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The bills will be high, but Europe will survive the winter: It buys enough oil and gas to get through the heating season.
The deeper costs will be borne by the world’s poorest countries, which have been left out of the gas market by Europe’s sudden surge in demand. It leaves emerging market countries unable to meet the demands of today or tomorrow, and the most likely consequences — factory closures, more frequent and prolonged power shortages, social unrest — could stretch into the next decade.
“Europe’s energy security concerns are exacerbating energy poverty in the emerging world,” said Saul Kavonic, an energy analyst at Credit Suisse Group AG. “Europe does whatever it takes to suck gas from other countries.”
Cool weather and heavy rain have eased looming energy crises in Pakistan, India, Bangladesh and the Philippines after a summer of rolling blackouts and political unrest. But any relief is promised to be temporary. Colder temperatures are coming – parts of South Asia could be more bitter than London – and the chances of a long-term supply are slim. A strong dollar only complicates the situation, forcing countries to choose between buying fuel and paying down debt. In this context, global fuel suppliers are increasingly wary of selling to countries that may default.
At the center of the problem is Europe’s response to tightening fuel supplies and the war in Ukraine. After cutting ties with Russian gas, the European country turned to the spot market, where energy not committed to buyers is available for short-term deliveries. With prices soaring, some South Asian suppliers simply canceled long-planned deliveries and looked to other regions for higher volumes, traders said.
“Suppliers don’t need to focus on making sure their LNG goes into less affordable markets,” said Raghav Mathur, an analyst at Wood Mackenzie Ltd.. The higher prices they can get on the spot market are more than enough to make up for their evasion plans. any fines that may be paid for the goods. That dynamic could continue for years, Mathur said.
Disruptions from global warming, such as devastating floods in Pakistan, are also wreaking economic havoc on emerging nations, prompting leaders at UN climate talks in Egypt this month to discuss how wealthy nations can help provide more support.
Meanwhile, Europe is accelerating the construction of floating import terminals to bring more fuel into the future. Germany, Italy and Finland have already acquired these factories. The Netherlands started importing LNG from the new floating terminal in September. Demand for natural gas in Europe is expected to surge by nearly 60% by 2026, according to Bloomberg New Energy Finance.
Exporters in Qatar and the United States are now accepting bids from European importers looking to buy fuel to fill new capacity. For the first time, emerging countries such as Pakistan, Bangladesh and Thailand were forced to compete on price with Germany and other economies several times their size.
“We’re borrowing other people’s energy supplies,” said Vitol Group chief executive Russell Hardy. “It’s not a big deal.”
Often, when short-term shortages arise, countries can enter into long-term supply contracts paying a flat rate to ensure reliable delivery for many years. This time it didn’t work. Even tenders for deliveries starting in the next few years have been rejected.
India’s latest attempt to lock in shipments from 2025 has failed. Bangladesh and Thailand have largely abandoned efforts to start contracts by 2026, when large new export plants in Qatar and the United States plan to start shipping fuel. Pakistan last month failed to complete a six-year deal that was due to start next year, after several previous short-term buying attempts also failed.
“We thought the crisis would be over by the end of the year, but it didn’t,” Kulit Sombatsiri, permanent secretary of Thailand’s energy ministry, said at a briefing on Monday. He added that if LNG prices continue to rise, the government will have to consider measures such as closing convenience stores and other energy-intensive businesses.
LNG suppliers are concerned that these countries will not be able to pay for promised deliveries. Fuel is denominated in U.S. dollars and currently costs close to $100 million per shipment. By comparison, the average LNG shipment in the 2010s was $33 million. Because the dollar has been appreciating rapidly, the cost in local currencies remains higher, adding to the pressure on these countries’ struggling finances.
Pakistan’s foreign exchange reserves fell to a three-year low last month, pushing Moody’s Investors Service’s credit rating on the country deeper into junk status. Reserves in Bangladesh, India and the Philippines are at two-year lows. In Thailand, where inflation is already at a 14-year high and reserves are at a five-year low, the central bank has warned that if the baht does not stabilize soon, the situation will worsen.
Without Russian gas flowing into Europe, the global gas market will remain tight. Spot prices will remain high, and without the ability to secure long-term supplies, developing countries may seek dirtier fuels or other partners.
The IEA said in its World Energy Outlook 2022 that gas growth momentum in developing economies has slowed, especially in South and Southeast Asia, undermining gas’s role as a transition fuel. Natural gas is the cleanest fossil fuel fuel and emits less carbon dioxide than coal when burned.
Energy shortages have brought the emerging world and Russia closer together. Russia is more than happy to fuel Pakistan, India and other countries excluded from the spot market.
“We have established contacts with the Russian side. Of course, we are very interested in purchasing LNG,” Shavkat Ali Khan, Pakistan’s ambassador to Russia, told state-run TASS news agency. “What would happen to us if the rich countries took all the LNG?”
Poorer countries may also switch to cheaper fuels such as coal and oil. Or they will seek to develop their own domestic resources. The Bangladesh International Chamber of Commerce has urged the government to speed up onshore and offshore gas exploration to replace expensive LNG. Critics of the Pakistani government are asking why they have not developed gas reserves in parts of the country.
“The only saving grace is that it’s not too cold,” said Shaiq Jawed, managing director of JK Group, a Pakistan-based global supplier of textiles to the global hotel chain. This summer, for the first time in 25 years, the company received only half of the gas it needed, he said. It can run on electricity and coal-fired power if needed. “It’s a last resort, but going out of business is not an option.”
None of these are good options for people worried about climate change and the environment. Coal and oil are dirtier than natural gas. The process of extracting new fossil fuels is energy-intensive and associated with increased pollution and seismic activity.
“If natural gas is going to exceed our capacity, obviously you are looking at reverting to coal to some extent because you need to produce a basic level of electricity,” Finance Minister Nirmala Sitharaman said last month. “And that can’t be done with solar or wind power alone.”
Renewable energy sources, such as solar energy, could eventually provide relief. Until then, high prices will play a role. Gas demand growth in emerging Asia slowed “significantly” between January and July as high prices weighed on consumption, according to the IEA. Demand in Thailand, the region’s largest gas user, fell 12% during the period as high prices squeezed use in the power sector and lower domestic production reduced supply.
The government will have to do the rest, distribute fuel and arrange for blackouts when there is not enough energy.
WoodMac’s Mathur said it would take up to four years for the market to reach equilibrium. Until then, price volatility will be the norm, he said, “LNG will first belong to the ‘developed countries’ and the rest to the ‘developing countries’.”
South American countries, such as Brazil and Argentina, may be slightly insulated, given their investments in hydropower. Even so, Brazil’s import bill more than doubled to $3.7 billion in the first seven months of the year amid soaring overseas prices and delays in domestic pipeline projects. If the rainy season is later this year, Brazil may need more LNG imports to buy time.
“We shouldn’t forget the part of LNG we get that others don’t,” said Torbjorn Tornqvist, chief executive of Gunvor Group Ltd.
Meanwhile, the Philippines and Vietnam are reconsidering plans to start importing LNG. The Philippines continues to delay the start-up of its first import terminal, while the Vietnamese government is considering cutting the capacity of planned gas-fired power plants. The projects are designed to meet surging domestic demand. Policymakers have yet to come up with an alternative.
– With the assistance of Ann Koh and Patpicha Tanakasempipat.
(Correct Kulit Sombatsiri’s title in paragraph 13.)
More similar stories are available at Bloomberg
©2022 Bloomberg
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