Asian LNG demand can’t be taken for granted
There couldn’t have been a more compelling reason to fly to Europe last week than to join the global gas and LNG industry converging en masse in Milan for the annual Gastech conference.
The Kremlin’s weaponisation of gas – combined with the EU’s momentous decision to turn its back on Russian gas as soon as possible – has left Europe scrambling to plug the gap. Cue a procession of energy ministers taking the stage in Milan to sing the praises of LNG. For northern European politicians in particular, LNG is suddenly a force for good. At least for now.
However, surging European LNG demand is hitting Asian buyers hard. Asian LNG spot prices trade broadly at parity to Northwest European LNG DES prices, but despite the healthy discount to European spot prices, few Asian buyers can compete to secure spot cargoes at this year’s prices. And while European market dynamics have improved recently with storage levels at record highs, the worst could be yet to come should cold weather and falling Russian pipeline flows push European LNG demand higher still.
We expect Europe to continue throwing the kitchen sink at securing LNG supplies – at whatever the cost – over the next few years, meaning further demand response from Asia looks almost certain, given limited LNG supply growth. But where in Asia is demand at greatest risk, can suppliers still count on Asian LNG demand recovery, and what do Asian buyers really want from suppliers amidst the current crisis?
I had the pleasure of moderating a Gastech session in Milan where these critical questions were discussed with leaders from Asia’s major LNG buyers as well as LNG suppliers, traders and infrastructure players.
Assessing the impact on Asia as the global LNG industry pivots towards Europe
Energy security and affordability have been catapulted to the very top of Europe’s political agenda, shifting LNG trade flows and effectively pulling supply away from Asia. As a result, Asian LNG demand has already fallen 7% year-to-date in the face of surging European demand and prices.
But this headline number only tells part of the story: the biggest falls have been in Asia’s most important growth markets, with Chinese and Indian demand declining 20% and 18% respectively. Other markets are also suffering as rising electricity prices have led to rolling power blackouts and curtailments to industrial users. In extreme cases, the spike in LNG prices has contributed to political and social unrest in countries like Pakistan and Bangladesh.
Asian buyers in Milan were clear that this may continue for some time. Several spoke of further demand response being needed through the first half of this decade until new LNG supply eases the market from 2026.
Which Asian markets are most vulnerable?
It is well understood that Asian buyers purchase much of their LNG on long-term contracts, typically indexed to oil and much cheaper than current spot LNG prices. So, it is really uncontracted spot demand in Asia that is at risk in the current crisis, particularly from those consumers with weaker purchasing power.
Given that both China and India have high spot exposure and high availability of alternative fuels, this helps explain their large drop in LNG spot buying as consumers switch to coal and fuel oil. Bangladesh, Pakistan and Thailand are also at the high-risk end of the scale. At the other extreme are markets with low spot exposure and limited fuel switching alternatives, including Singapore, Japan and South Korea.
Asia remains the engine of long-term LNG demand growth…
How and when Asian LNG demand recovers were unsurprisingly key questions for LNG suppliers in Milan. While US LNG, for example, will play an essential role in replacing Russian gas exports to Europe over the next few years, it is future Asian demand that will dictate the profitability of new US Gulf Coast supply (as well as large-scale conventional LNG projects). Europe may be flavour of the month right now, but it is seeking to move away from gas as soon as is practicably feasible. Sellers know that these molecules must find a home in Asia in the not too distant future.
With suppliers gearing up for an unprecedented wave of investments as Europe scrambles for more gas, Asian buyers recognise the potential for an LNG glut and even a possible price crash after 2026 as new volumes hit the market. This anticipated drop in prices, combined with the widely held belief that displacing coal with gas – and green LNG in particular – in the power sector must be central to decarbonisation goals, is supporting confidence in a strong rebound in gas demand. It is no coincidence that Asian orders for new combined cycle gas turbines are at their highest level in a decade.
…but buyers want more from suppliers
This optimism comes with caveats. Government policies towards coal in several Asian countries remain ambiguous at best. In addition, rebuilding confidence in LNG demand may not automatically translate into an new wave of long-term contracting. Buyers from across Asia, particularly from China who have contracted massively over the past two years, were anxious to stress that they can’t always commit to 20 year deals. Contracting flexibility and optionality within deals are critical to those looking to manage a less certain demand outlook. In mature markets, buyers want to continue to build trading portfolios and invest in developing economies to offset expected declining demand at home.
And while even the most price sensitive markets in Asia now recognise that they can no longer simply ask for ‘cheap’ LNG, they do ask that sellers recognise that their domestic energy regulation and pricing systems just can’t yet cope with high prices and inflexible contracts. Without the right contractual, financial and infrastructure support, these economies risk deepening their dependence on coal and derailing their energy transition.
Source: Wood Mackenzie