IEEFA: High LNG prices erode economic case as transition fuel

Sustained high prices over the past year have eroded the economic case for LNG and hurt LNG sales in key Asian markets, according to a new Institute for Energy Economics and Financial Analysis (IEEFA) report. The global LNG industry had pinned its long-term hopes for growth on emerging markets in China, South Asia, and Southeast Asia.

“Less than 1 year into higher prices, LNG markets are already seeing a major realignment of demand away from Asia. Should price spikes and volatility continue over the next several years, downward pressures on Asian LNG demand may accelerate, permanently impairing long-term regional demand growth,” said Sam Reynolds, author of the report, ‘The Economic Case for LNG in Asia is Crumbling.’ “Financiers and investors in new LNG projects must take note.”

LNG sales in Asia through July 2022 have fallen more than 6% compared with last year. In China and India, two of the largest potential LNG growth markets, LNG imports have fallen 20% and 10% year-over-year, respectively.

Demand in Asia could fall further as competition for limited supplies intensifies during the winter heating season. Multiple countries have withdrawn or been forced out of LNG spot markets altogether.

Elevated LNG prices hit demand

High, volatile LNG prices are unlikely to settle for several years due to myriad factors. The threat of continued Russian cuts of European piped natural gas, outages at liquefaction plants, and increasingly unpredictable weather due to climate change could all constrict an already tight global market.

“Exorbitant prices and unreliability of supply are undermining industry-driven narratives that LNG is a viable ‘bridge fuel’ from coal,” said Reynolds. “Continuous demand growth at persistently high prices will likely prove fiscally unsustainable for emerging markets.”

As a result, numerous forecasting agencies have begun cutting estimates for Asia’s medium-term LNG demand growth. The International Energy Agency’s (IEA) latest outlook for gas demand growth in Asia through 2025 is 65 billion cu m (bcm) less than its 2021 forecast. Bloomberg New Energy Finance has cut its expectation for LNG demand in South and Southeast Asia in 2025 by 37 bcm, according to the report.

Other mainstream forecasting agencies, such as Rystad Energy and Independent Commodity Intelligence Services, have also expressed the risk of permanent reductions in emerging Asia’s LNG demand, Reynolds said.

Unaffordability of LNG and fuel-supply insecurity may cause new import terminals to go unused, potentially costing billions of dollars in stranded assets. As long as unaffordable LNG prices and procurement problems continue, US$96.7 billion dollars of proposed LNG-related infrastructure in Pakistan, Bangladesh, Vietnam, and the Philippines will face heightened risk of underutilization or cancellation.

Efforts to reduce LNG dependence accelerate

Many analysts expect Asian demand growth to simply recover to pre-crisis levels once prices settle and new supplies come online. But countries are rapidly developing alternative energy sources that could permanently dent regional LNG demand growth, according to the report.

In China, LNG demand is coming under significant price pressure from new coal and renewables. The country is on pace to deploy 120 Gw of new renewables capacity this year, 40% higher than the previous 5-year average. Buyers will reportedly avoid spot market purchases for the rest of 2022, while pipeline gas imports were up 60% through April. Plans to expand pipeline capacity from Russia and Turkmenistan by 100 bcm/year could further reduce the need for LNG imports, Reynolds said.

South Asian countries have tried to maintain LNG import levels when possible, but financially unsustainable prices have led to severe fuel shortages and load shedding. Pakistan and Bangladesh have begun to explore domestic alternatives, including renewables and indigenous gas resources. An uptick in India’s domestic gas production and ambitious renewables targets mean that, according to the IEA, annual LNG demand may not surpass 2020 levels through 2025.

In prospective LNG markets like Vietnam and the Philippines, LNG import projects are facing delays, while policymakers are increasingly emphasizing the need to reduce dependence on imported fuels. In Thailand, high LNG prices, combined with declining domestic gas production and pipeline imports, are causing some of the highest gas and power prices ever, according to the report.

In Northeast Asia, meanwhile, the current LNG market has accelerated pre-existing decarbonization plans, breathing new life into renewables deployment and controversial discussions surrounding nuclear power. A renewed focus on energy self-sufficiency in Japan and the election of a pro-nuclear administration in South Korea are expected to have permanent repercussions on LNG demand.

“These shifts away from LNG are in their early stages. Should high prices and volatility persist for the next several years, the narrative around LNG as a viable, affordable transition fuel is likely to erode further,” said Reynolds. “Ultimately, high prices now may undermine profits and exacerbate stranded asset risks for LNG projects targeting completion later this decade.”