Gas cuts in Russia stoke Asian energy security fears | Energy

Taipei, Taiwan – The latest cut in Russian natural gas flows to Europe threatens to further destabilize energy security in Asia and could accelerate the move away from liquefied natural gas (LNG) in the region, experts say.

On Wednesday, the Russian energy giant Gazprom cuts gas supply to Europe via Nord Stream 1 at only 20% of pipeline capacity.

While Gazprom cited turbine maintenance for the disruption, European Union officials called the latest in a series of supply disruptions “politically motivatedDisplacement linked to tensions between Brussels and the Kremlin over the war in Ukraine.

LNG futures in Europe jumped 10% on the news, while spot prices in North Asia hit their highest level since March.

Utilities in South Korea and Japan are reportedly concerned that Europe is hoarding more gas as the northern winter approaches and are moving quickly to secure as many LNG cargoes as possible.

“The direct impact of the Nord Stream cuts will be increased competition for very limited LNG cargoes,” Kaushal Ramesh, Singapore-based gas analyst at Rystad Energy, told Al Jazeera.

“We expect Asian buyers who can afford it – mainly Japan and Taiwan – to compete with Europe. Physical transactions in Asia already exceed $47/MMBtu (Metric Million British thermal units) and yet we are still far from winter.

Pipes at the landing facilities of the 'Nord Stream 1' gas pipeline in Lubmin, Germany.
Russian energy giant Gazprom has cut gas supplies to Europe via Nord Stream 1 to just 20% of pipeline capacity [File: Hannibal Hanschke/Reuters]

Although significant regional variations in LNG prices have existed in the past, the market has become increasingly global in recent years. Asia’s prices are now closely tracking Europe’s, while the US is heavily discounted as the world’s largest producer of the commodity and is expected to largely continue its lead.

“The Asia-Europe link was established as US LNG really took off in recent years. The shipments then went to one or the other location in response to price signals,” Ramesh said.

“Today, Europe – which until 2020 was a ‘fallback’ market for cargoes no one else wanted – is deeply in deficit with a radical change in LNG demand, so it is in competition with Asia, which strengthens this link. As long as Europe is in deficit, events will continue to govern Asian LNG prices,” he said.

The effect of soaring prices is not being felt in the same way throughout the region. While deep-pocketed countries like Japan and South Korea have the reserves to absorb the big hikes, developing countries, especially in South Asia, are struggling to keep the lights on.

Pakistan has seen power cuts of more than 12 hours in recent weeks as the country’s new government scrambles to secure more gas. Prolonged outages amid extreme heat brought out crowds of angry Karachi residents in late June, with police using tear gas and batons to disperse protesters.

In early July, Pakistan’s state-owned gas company failed to attract a single supplier for a billion-dollar LNG procurement tender. The energy crisis has exacerbated new Prime Minister Shehbaz Sharif’s struggles to maintain legitimacy as his government tries to contain an economic crisis and negotiate bailouts with the International Monetary Fund.

In Sri Lanka, where energy shortages preceded the total collapse of the country’s economy and national government in May, the country’s gasoline stocks are on the verge of running out.

Runners line up for petrol in Sri Lanka.
Petrol stocks in Sri Lanka are about to run out [File: Dinuka Liyanawatte/Reuters]

Economists in the region say the resilience of countries will depend on the duration of volatility.

“If this is a short-term crisis that subsides over the next six months, I don’t expect any major new casualties,” Badri Narayanan Gopalakrishnan, an economist based in Al Jazeera, told Al Jazeera. in Delhi who was previously a consultant for the Asian Development Bank.

“I don’t think Pakistan will follow Sri Lanka’s path as it is slightly more diverse with greater domestic capacity and is relatively less reliant on expensive imports.”

“It’s a tough situation, but poorer economies are generally used to having lower energy supplies for a variety of reasons,” he added.

“Recent spurts of growth and development have certainly made many developing states more energy dependent, but this is still manageable if they diversify their energy sources, as India is increasingly doing. However, all countries are vulnerable if the situation stays the same for too long.

The rapid tightening of supply could also hurt demand as prices become unsustainable, which, combined with other destabilizing macroeconomic factors, would cloud an already fragile economic outlook.

“The biggest macro trend affecting demand now is pricing. We are beyond the affordability levels of much of the industrial sector, even in Europe,” Ramesh said.

“This means that, combined with the overall inflation in energy and food prices, as well as the interest rate hikes needed to pull us out of the inflationary trend, we should not ignore the impact of destruction of demand from an impending recession.”

The COVID-19 pandemic has pushed up global energy demand, with data from the International Energy Agency (IEA) showing a drop of more than 3% in the first quarter of 2020, as the recovery kicked in a resurgence with demand rising 6 percent in 2021. The IEA projects demand will rise 2.4 percent this year, matching pre-pandemic growth rates. However, soaring prices could threaten the place of gas in the energy mix in the future. The IEA is already predicting that gas consumption will contract slightly in 2022, while there has been a substantial downward revision to the commodity’s growth outlook in the coming years.

“We see the risk of a permanent destruction of LNG demand in some countries that could keep coal and fuel oil and go straight to renewables in a few years. Unless more competitively priced LNG is soon available to them. made available,” Ramesh said.

Gopalakrishnan said the leap to renewable energy would be crucial, especially for countries that lack coal reserves.

“Renewables have a low marginal cost and can reduce overreliance on imports for fuel,” he said.

“Ultimately, investing in renewable energy is the way forward for the region.”

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