Gas poverty: How prolonged high spot gas prices is destroying the LNG demand of the developing nations of South Asia, Southeast Asia and South America
South Asia, Southeast Asia and South America imported 19 million, 8 million and 5 million tonnes of LNG respectively during the first half of 2021. The regions’ LNG import grew 7%, 3% and 140% year-on-year on the back of declining domestic production, drought cutting hydropower production and years of planning to switch away from a coal-based economy.
However, this growth was reversed into a dramatic decline starting from September 2021, when the EAX – ICIS’ benchmark spot LNG price for Asia – broke above US$20/MMBtu and has never looked back.
ICIS LNG Analytics’ forecast shows that 11 million tonnes of LNG demand within these developing regions will be destroyed this year, and a further 7m tonnes next year, as spot prices continue to stay above $20/MMBtu.
The ICIS’ EAX and TTF reached nearly $70/MMBtu in early March 2022 on the back of the Russia-Ukraine war. A typical LNG cargo which would have cost $40 million at a $10/MMBtu price level, will cost more than $120 million at the time of writing.
Gas-based economies: How difficult is it for developing nations to drastically reduce gas consumption this year and next?
The short answer is that it is quite difficult for some countries to immediately cut back their gas consumption except through demand curtailment: simply turning things off. This is especially true for gas-producing countries that have spent years building their gas-based infrastructure to drive the nation’s economy.
In fundamental terms, this means the country has a high percentage of gas consumption in critical sectors such as power, industry and in some cases heating, fertilizer and transport.
To find out whether any country can drastically reduce its gas dependence – for example on a short two years’ term – we need to know if the country has a gas-based economy and more importantly, how “sticky” has gas consumption become throughout various critical sectors.
Coal is commonly used as one of the main fuels across all developing nations. Therefore, it makes sense to measure the ratio of each countries’ gas consumption over coal as an indicator of the country’s reliance on gas, and how easily coal can replace gas in the short term. Note that this is a one-dimensional analysis, which can be further expounded by incorporating other types of baseload fuels.
Of the many countries deemed to have a gas-based economy, Argentina, Bangladesh and Singapore are positioned at the extreme end, where coal-use is minimal when compared with gas consumption, both in total volume and within the critical power sector. It is impossible for these three countries to be able to significantly reduce gas consumption in the short term.
According to ICIS’ latest LNG demand forecast, both Bangladesh and Singapore fortunately possess sufficient contracted volumes in place to weather the spot market tightness this year and next. The same cannot be said for Argentina, with zero long-term contract volume signed. It will need to actively search out alternative sources of gas. The government is betting on being able to significantly increase its domestic gas production to eliminate LNG imports.
Brazil, Pakistan and Thailand do not seem to have gas as entrenched in their systems comparatively, and thus will have a chance to reduce their gas consumption, likely by switching some over to coal, but also other fuel types.
ICIS LNG Analytics have been actively downgrading our basecase LNG demand for these three countries in the past six months, as a direct result of the escalating spot price. Pakistan and Thailand have secured a good amount of long-term LNG, but not Brazil. While we are not expecting Brazil to import as much as last year’s record high of 7.8 million tonnes, securing even half of that amount in the spot market will be extremely costly and challenging.
Finally, with an existing high level of coal consumption in India, Indonesia, Chile, Philippines and Vietnam, ICIS expects these countries to be able to switch away from LNG-use relatively easier and thus they can act as a swing consumer in the extremely tight LNG market. The latter two Southeast Asian countries are likely to delay the start of their LNG imports to the end of this year, or possibly even later.
Developing nations set for 18 million tonnes of LNG demand destruction in coming two years
ICIS LNG Analytics have seen a dramatic decline in LNG demand as the spot price climbs higher. Our benchmark Asian spot LNG price, the EAX, climbed above $20/MMBtu from September 2021 onwards and never retreated below this number since. What seemed to be bullish summer demand in the first half of 2021 quickly reached an unsustainable price level for many buyers going into the winter of 2021. And now, it is at a level that worries not only the buyers, but even sellers concerned about the long-term sustainability of demand, according to Alex Froley, ICIS Lead LNG analyst.
Many observers may have severely under-estimated the growth of LNG demand as a transitional fuel in recent years. Even in future low carbon scenarios large volumes of gas are likely to still be required, particularly for developing nations switching away from coal, despite investment in gas becoming increasingly unfashionable in some developed nations.
On the supply side, the response has been lukewarm over the past few years – both in LNG supply projects and in upstream gas investments. Many existing gas fields across South Asia, Southeast Asia and South America have been neglected and been experiencing double digit output declines due to under-investment, concession issues and operational inefficiencies, such as in Argentina, Bangladesh, Chile, India, Indonesia, Pakistan and Thailand. And this is a fundamental global gas supply problem, not just caused by any single event, such as the Russia–Ukraine war.
Our latest March 2022 forecast update has pegged the combined total of these developing nations at 58 million tonnes this year and 69 million tonnes next year, but we expect to revise this lower again in our next update, adding further volumes into the estimated demand destruction.
LNG demand destruction is a price response to the lack of supply globally. Actions that could be taken include fuel switching and demand curtailment measures such as black-outs, brown-outs or shutdowns. How quickly various developing nations react will depend on how sticky gas consumption is throughout the country’s different sectors.
For further data and insights on LNG, please reach out to ICIS LNG Analytics https://www.icis.com/explore/services/analytics/lng-analytics/