Report

The Winners and Losers From Falling Asian Gas Prices

Plunging natural gas prices in Asia are a boon for some countries -- but a massive headache from Vladivostok to Vancouver.

SHELLLNG

The swoon in oil prices is driving another big change in global energy markets — a collapse in the price of liquefied natural gas in Asia. That promises big implications for producers and consumers alike and could even have knock-on effects on Russia’s plans to shift more of its energy business to the east.

For years, Asian countries such as Japan and South Korea have been the biggest importers of tankers full of liquefied natural gas (LNG), and as a result, the region has always paid more than other parts of the world. That so-called “Asian premium” grew so big early last year, thanks to rising oil prices and steadily growing demand for gas, that countries such as Japan paid five times as much as the United States did for the clean-burning fuel.

Now that premium is evaporating, making gas cheaper for big Asian buyers — and making the future a whole lot darker for gas exporters like the United States and Australia. Delivery prices for LNG in Japan reached $20 per million British thermal units in March 2014, twice as high as prices in Europe. One year later, LNG prices in Asia have plummeted to about $7 — slightly lower than what Europeans now pay.

Part of that plunge is due to lower oil prices, which have fallen about 50 percent since last summer. Most gas contracts in Asia are linked to the price of oil, so when crude gets more expensive, so does gas — and vice versa.

And part of the sharp decline is also due to the same sorts of supply and demand fundamentals that have roiled oil markets. Asian economies like Japan and China are slowing down, which depresses their demand for gas even as more and more of it floods into the market.

As a result, loaded LNG tankers have been piling up around big Asian trading hubs, hoarding cargoes that are only one-third as valuable as they would have been last year. Other tankers slow-foot it on their way to the Pacific, hoping the market improves by the time they arrive. One-tenth of the global LNG tanker fleet is currently idled, waiting out the doldrums.

“Once you get a surplus, it very quickly turns into a calamity in the industry,” said James Jensen, founder of natural-gas consultancy Jensen Associates.

That’s what it is starting to look like in the United States and Canada. Both are trying to turn a domestic energy boom into an export bonanza, and both are banking heavily on the Asian market. But a slump in demand for gas, and much lower prices, make the prospect of building additional, multi-billion terminals a tough proposition. Things are just as glum Down Under, where analysts were already wringing their hands about the coming “train crash” of Australia’s LNG hopes.

Of course, if it’s any consolation for Washington and Ottawa, the sudden transformation of the global gas market is also creating headaches for Russia. Moscow had big plans to jump into the LNG market with both feet, as well as expand overland energy trade with China. The price collapse threatens both.

Still, the calamity is good news, at least in the short term, for importers of natural gas. Thanks to a cheaper bill for LNG imports, Japan slashed its trade deficit in January by 60 percent compared to a year ago. Japan had run trade surpluses for three decades before the Fukushima nuclear accident in 2011 forced the country to buy massive amounts of expensive LNG; now that the gas is getting cheaper (and the country is buying less) Japan’s books are getting closer to the black.

And cheaper gas could also be good news for countries like China and India, which are trying to figure out how to use less coal in their electricity sectors to curtail deadly air pollution. Chinese energy giants such as PetroChina, Sinopec, and China National Offshore Oil Corporation are all snapping up bargain-priced LNG cargoes for delivery this spring.

In India, the sudden availability of relatively affordable gas means that the country can use power plants that had been offline due a lack of supplies. That means the country should avoid big power shortages this year, New Delhi’s energy minister said.

That said, cheaper LNG won’t kick coal entirely out of the energy mix, because the dirty black rock has also gotten cheaper thanks to the global slump. Natural gas prices would have to fall even further to be economically competitive with coal for power generation in China and India. As Energy Aspects, a U.K.-based consultancy, noted recently: If using previously pricey LNG to run power plants was like drinking champagne as a thirst quencher, using slightly cheaper LNG for power is like chugging cava.

Still, even half a world away, the collapse of the Asian premium carries benefits. Europe has long been second-tier market for LNG cargoes, because it offered skimpier returns for gas sellers. Even so, LNG imports were still more expensive than Russian natural gas brought overland in pipelines. Many cargoes that did land were simply re-exported to Asia, chasing a bigger payday. All that simply reinforced Europe’s dependence on Moscow for energy supplies.

But cheaper LNG in Asia means Europe is becoming as attractive a market. That’s great news for countries such as Lithuania and Poland, which are turning to LNG to break Moscow’s grip. And for Europe as a whole, the availability of more LNG sloshing around gives Brussels more energy options.

“Some of the stuff is going back to Europe now,” Jensen said. “Now, there’s really no incentive to re-export out of Spain or Belgium or wherever to Asia, so it adds to the European supply.”

But the price plunge is creating plenty of losers, too. Countries such as the United States, Canada, and especially Australia were pinning hopes for multi-billion dollar gas export projects on a lucrative Asian market. With the collapse of the Asian premium, the economics on many of those projects — and especially the high-cost developments in Australia — simply look untenable. That holds true for yet-to-be-developed gas export plans in East Africa, too.

U.S. gas export projects, especially those on the West Coast, are finding it hard to attract the billions in financing needed to build the sophisticated terminals. Some analysts expect the vast majority of the 30-odd projects under consideration will wither on the vine due to lousy economics. A similar gloom is descending on Canada’s hopes to turn the Pacific coast into a gas-export hub.

And Australia’s outlook is even more dire. The plunge in prices looks set to knock a $30 billion hole in the country’s gas export projections. And that, in turn, is putting Australian state budgets — that just a year ago were counting on a rain of riches from gas sales — under increasing strain.

Cheaper LNG in Asia could also produce another, less expected, loser: Russia. Lower prices, and Western sanctions, have already put Russia’s LNG projects under severe pressure. Companies building one LNG terminal on the Yamal peninsula are hoping demand will pick up enough in the next few years to make the economics work.

But even Russia’s pipeline dreams could be in danger. Last year, as part of its long-term plan to shift more energy sales to Asia, Russia inked a pair of mammoth, if preliminary, natural-gas deals with China. Work on the first, the Power of Siberia pipeline, is already underway.

A flood of cheap LNG imports into Asia calls into question the viability of the second big project, the Altai pipeline from Western Siberia into Western China. That could derail the project right when Russia needs to get in on the ground floor of the Asian market.

“A big question is whether China will agree to convert the Altai gas memo of understanding into a binding agreement” over the next year, said Keun-Wook Paik, an expert on Russian-Chinese energy trade.

“Russia is fully aware that the pendulum moved from the seller’s side to the buyer’s side,” at least through the rest of the decade. In the 2020s, as demand in Asia and Europe starts to rebound, that could change–but the infrastructure needs to be built now to take advantage of it.

“For Russia, it is the most important time to penetrate Asia, in particular the Chinese gas market,” Paik said.

Photo credit: SHELL/Flickr

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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