Volatile prices put US$50b of gas projects in Asia at risk, report warns

Highly volatile prices will make LNG power plants more costly and unpredictable to operate in emerging economies such as Bangladesh, Pakistan and Vietnam, says an energy think tank. This bolsters the case for a pivot to renewables.

Gas-fired power plant
A gas-fired power plant. Gas price volatility already led Bangladesh and Pakistan to call off several tenders for LNG deliveries at the end of last year, with more cancellations expected to follow. Image: Mscalora, CC BY-SA 4.0 via Wikipedia Commons

Gas price volatility is threatening gas ventures in the pipeline in several of Asia’s emerging markets, warns a new report by an energy think tank.

The analysis, published on Friday (15 January) by the Institute for Energy Economic and Financial Analysis (IEEFA), shows that planned gas-fired power stations and liquefied natural gas (LNG) import facilities worth US$50 billion face a high risk of cancellation in Bangladesh, Pakistan, and Vietnam as skyrocketing LNG prices hit the region.

For Asia’s utilities, the price spike means their power plants could partly lie idle in the coming year, making gas-fired electricity unaffordable. Erratic prices may be here to stay, and this could see many new projects become unbankable, calling ambitious gas development plans into question, stated the report.

Bruce Robertson, IEEFA energy finance analyst and author of the analysis, said price volatility had already led Bangladesh and Pakistan to call off several tenders for LNG deliveries at the end of 2020, with more cancellations expected to follow.

“Emerging markets are particularly price sensitive and will find the forthcoming gas price environment challenging,” he said. “Higher and volatile LNG prices will make operating LNG-powered generation plants more costly and unpredictable. This may lead to the underutilisation of LNG plants and rising gas and electricity tariffs for customers.”

Asian LNG spot prices—the amount charged for immediate delivery of the fuel—have soared to unheard-of highs in the wake of stronger seasonal demand for heating as freezing weather grips much of the northern hemisphere. Logistical challenges have also disrupted supply and led to higher freight rates.

Reuters reported last week that the average LNG price for February delivery into northeast Asia is estimated to be around US$21.45 per million British thermal units (mmBtu), a 47 per cent increase from the previous week. Over the weekend, an Australian LNG cargo changed hands for an amount 18 times higher than prices six months ago.

IEEFA warned the hike may be a precursor to higher and more unpredictable rates in the future, with less affordable LNG contract prices a likely outcome.

That’s largely the result of Covid-19’s impact on global energy demand. Low levels of investment and financial instability in the oil and gas sector have caused a collapse in drilling activity in Australia and the United States, both major global LNG exporters. This has resulted in 43 bankruptcies in North America alone, leading to production losses. It means that once the world economy bounces back from the crisis, it is set to send oil and gas prices surging.

“While contract gas prices have been low and relatively stable in recent years, this is unlikely to last,” said Robertson. “It is likely that a new era of higher prices and more volatility is upon us.”

What does it mean for renewables?

Such prospects have potential implications for Asia’s energy transition. Energy security has become a major concern across the region, prompting more governments to throw their weight behind renewables, not only due to steep declines in clean energy costs but also because solar and wind technologies do not require imported fuels.

“Asian countries should be looking to deflationary renewable energy as a cheaper, more predictable alternative resource to LNG,” Robertson said.

Isabella Suarez, analyst for Southeast Asia at the Centre for Research on Energy and Clean Air (CREA), an independent research organisation, said the unpredictability of LNG markets increase the need for alternatives that can be built quickly and at scale, especially in countries with growing energy demand and plans for a significant natural gas share in their energy mix.

“We know that such alternatives are found in renewable energy,” she said. “Clean energy technologies, particularly solar and wind, have had a prolonged and consistent period of technological improvement and cost reduction. They have also managed to remain competitive amidst the pandemic.”

Suarez said the idea that gas could serve as a bridge fuel to help get countries off coal, while renewable energy is developed, had always come with caveats. “The stars have just not aligned to make gas more feasible, reliable or affordable, particularly for emerging economies,” she told Eco-Business. “The last thing these countries want is to have something that was meant to be a ‘bridge’ become a problem for electricity prices and system reliability.”

Vaibhav Saxena, foreign counsel at Vietnam International Law Firm (VILAF) and vice chairman at the Indian Business Chamber in Vietnam, said while erratic gas prices provide a compelling case for pivoting to renewables, Vietnam was unlikely to abandon its LNG development plans.

Although Vietnam views solar and wind as key technologies to meet burgeoning power demand in the coming years, it sees a greater role for gas in its energy mix in the long term, he said. With financiers increasingly reluctant to back coal ventures, news emerged last year that the country might scrap half of its coal power pipeline in favour of gas and renewables.

Vietnam is already preparing for greater price volatility going forward, Saxena explained. Developers that submit LNG project proposals, for instance, are now expected to integrate extensive storage facilities to have sufficient reserves to fall back on during price spikes.

Gas currently provides 17 per cent of Vietnam’s electricity, and around 61 per cent of Pakistan’s. In Bangladesh, domestic gas—which is is depleting—makes up about 60 per cent of the power generation mix.

No more volatile than before?

Some analysts, however, do not believe LNG prices—which have always inched up during the colder months in the northern hemisphere—will be more volatile than before. Daine Loh, power and renewables analyst at intelligence and research firm Fitch Solutions in Singapore, said market volatility has been particularly pronounced in recent weeks due to an unusually harsh winter, exacerbated by supply disruptions in Australia, Indonesia, Malaysia, Qatar, and the United States.

“There have always been uncertainty and instability to prices all along, and I don’t see any major structural change to this from recent events that will make it more unstable than it once was,” she told Eco-Business.

“There’s a possibility for projects to be delayed. But I do not believe they’ll be cancelled for solely this reason,” she added.

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