Home Commodities Europe’s desire for LNG leaves developing countries starving for gas

Europe’s desire for LNG leaves developing countries starving for gas

by SuperiorInvest

Europe’s overwhelming desire for liquefied natural gas to replace Russian pipeline exports is leaving developing countries starved for gas and creating a market for traders who can profit from the rush to secure supplies.

China, India, Brazil, Pakistan and Bangladesh will see the biggest drop in demand for liquefied natural gas this year, down 34.5 million tonnes from last year’s forecast, according to data compiled for the Financial Times by commodities analyst ICIS . . This equates to roughly 9 percent of global LNG supplies in 2021.

They are increasingly being outbid by offers for expensive LNG from wealthier countries trying to fill the hole left by Russia, which is restricting energy exports. Demand in Europe, Japan, South Korea, Taiwan and Thailand is expected to increase by a total of 46.6 million tonnes this year. Europe, including the UK, accounts for 85 percent of the increase in demand, according to ICIS.

This imbalance not only threatens many developing economies with energy crises that may prolong their dependence on dirtier forms of fuel. LNG traders also want to profit from price differences on world markets, as these countries often use the spot market to buy the commodity.

Countries like Pakistan and Bangladesh “are hanging on to spot costs and paying as much as they can in this bidding war, mainly with Europe,” said Alex Siow, senior Asia gas analyst at ICIS. “We still hear them trying to offer lower prices, and sometimes they get the odd load here and there.” Unfortunately, it’s not enough for everyone.”

With the level of growth in LNG demand outpacing the devastating declines, “it’s safe to say [the LNG market] will continue to be tight until 2025-2026 when some of the larger LNG plants come online,” Siow added.

That squeeze has pushed the average price in Asia’s benchmark spot, or cash, market nearly 140 percent higher this year than last year.

Some traders spot an opportunity in the market. Long-term contracts that were signed years ago are linked to reference prices that are much lower than current prices.

Although LNG traders pay penalties for skipping contracted deliveries, they can make a substantial profit by selling in the spot market, where prices are much higher.

The former Singapore unit of Gazprom, which had an obligation to supply Gail, India’s state-owned gas distributor, for 20 years under a deal signed in 2012, has recently come under the spotlight.

In its earnings in early August, Gail revealed that it had not received contracted quantities of LNG from the former Gazprom unit – now called SEFE Marketing & Trading after Germany took control of its parent company – since May, with LNG traders suspecting that the sale of cargoes destined for Gail on the spot market.

SEFE, which stands for Securing Energy For Europe, said in a statement to the Financial Times that this was because it was managing its LNG stocks as it “is currently without a significant portion of its gas supply” following what it called “Russian sanctions”. on the group. “As European markets become even tighter, [the Singapore-unit] uses contractual mechanisms in its agreements to manage the situation,” it said.

One LNG trader said he had seen “several cases” of industry players canceling their long-term contracts and selling cargoes on the spot market at a higher price since gas prices started rising in Asia and Europe last summer. margin despite the “risk of complete destruction of confidence”.

Toby Copson, global head of trading and advisory at gas trading company Trident LNG, said that if traders can make more profit by canceling a cargo and selling it to someone else for a good markup, “they will do it every time. .”

“The provisions in the contract allow for that.” . . It’s nothing new. If you’re on the other end of that trade, it’s frustrating, and with the market so tight now, it’s going to have disastrous consequences,” he added.

Developing countries that have been unable to secure LNG are increasingly turning to dirtier forms of fuel.

Consultancy Wood Mackenzie said small industries in India are switching to fuel oil and LPG for heating, while electricity generation from oil has increased fivefold in Pakistan and 45 percent in Bangladesh.

High prices for LNG and other fuel sources have been particularly painful for South Asian countries, which are heavily dependent on natural gas imports for electricity generation. Pakistan and Bangladesh, for example, have experienced large-scale power outages in recent months.

Pakistan’s fuel shortages have sparked a surge in demand for alternatives such as coal from neighboring Afghanistan, where the Taliban promotes exports to its energy-starved neighbor. Some researchers estimate that Afghan coal exports to Pakistan have doubled this year.

“European and Japanese storage is filling up significantly, but there are questions about how long that will last,” said Sam Reynolds, an energy finance analyst at the Institute for Energy Economics and Financial Analysis.

If Europe does not reduce its gas consumption, “next March we could be exactly in the same place where it has to absorb more LNG. And so countries in emerging Asia are going to take every opportunity to leave the lights on, and that may mean dirtier fuels, perhaps more imports from neighboring countries.

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