Russia’s gas cuts raise Asia’s energy security concerns | Energy

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Taipei, Taiwan – Recent cuts to the flow of Russian natural gas to Europe threaten to further destabilize energy security in Asia and could accelerate the movement away from liquefied natural gas (LNG) in the region, experts say.

On Wednesday, Russian state-owned energy giant Gazprom cut gas supplies to Europe via Nord Stream 1 to just 20 percent of the pipeline’s capacity.

While Gazprom cited turbine maintenance for the disruption, EU officials called the latest series of supply disruptions a “politically motivated” move related to tensions between Brussels and the Kremlin over the war in Ukraine.

LNG futures in Europe jumped as much as 10 percent on the news, while spot prices in North Asia jumped to their highest since March.

Utilities in South Korea and Japan are reportedly worried that Europe will stockpile more gas as the northern winter approaches and are moving quickly to secure as much LNG cargo as possible.

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

“We hope that Asian buyers who can afford it – especially Japan and Taiwan – can compete with Europe. Physical transactions in Asia are already at $47/MMBtu (Metric Million British thermal unit) but we are not close to winter yet.”

Pipes at the 'Nord Stream 1' gas pipeline landing facility in Lubmin, Germany.Russia’s state-owned energy giant Gazprom has cut gas supplies to Europe via Nord Stream 1 to just 20 percent of pipeline capacity. [File: Hannibal Hanschke/Reuters]

Although significant regional variations in LNG prices have existed in the past, the market has become increasingly globalized in recent years. Asian prices are now following those in Europe, while the United States enjoys significant discounts as the world’s largest producer of commodities and is widely expected to continue to lead in the future.

“The Asia-Europe relationship was built because US LNG really took off in recent years. The cargo then goes to one of the locations in response to a price signal,” said Ramesh.

“Now Europe – which until 2020 was a ‘backstop’ market for positions that no one else wanted – is running a deep deficit with the pace of change in LNG demand, so they are competing with Asia, strengthening that relationship. As long as Europe is in deficit, events there will continue to regulate Asian LNG prices,” he said.

The effects of soaring prices were not felt evenly across the region. While deep-pocketed countries like Japan and South Korea have reserves to absorb sharp gains, emerging economies, particularly in South Asia, are struggling to stay on.

Pakistan has experienced rolling blackouts of more than 12 hours in recent weeks as the country’s new government struggles to get more gas. Prolonged blackouts amid the extreme heat brought crowds of angry Karachi residents into the streets in late June, with police using andon tear gas to disperse protesters.

In early July, Pakistan’s state-owned gas company failed to attract a single supplier for a $1 billion LNG purchase tender. The energy crisis has exacerbated new Prime Minister Shehbaz Sharif’s struggles to maintain legitimacy as his government tries to contain the economic crisis and negotiate a bailout with the International Monetary Fund.

In Sri Lanka, where energy shortages preceded the complete collapse of the country’s economy and national government in May, the country’s oil stocks are running low.

Riders waiting in oil line in Sri Lanka.Gasoline stock in Sri Lanka is running low [File: Dinuka Liyanawatte/Reuters]

Economists in the region say the country’s resilience will depend on the duration of volatility.

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

“I don’t think Pakistan will be like Sri Lanka in that it is a bit more diversified with a larger domestic capacity and is relatively less dependent on expensive imports.”

“This is a difficult situation but poorer economies are usually used to having lower energy supplies for a variety of reasons,” he added.

“The recent spike in growth and development has clearly made many developing countries more dependent on energy, but this is still manageable if they diversify their energy sources, as India is increasingly doing. However, all countries are vulnerable if the situation remains the same for too long.”

Rapid supply tightening could also hurt demand as prices become unsustainable, which, combined with other volatile macroeconomic factors, will darken an already shaky economic outlook.

“The biggest macro trend affecting the demand side right now is price. We are beyond the affordability level of most industrial sectors even in Europe,” said Ramesh.

“That means, combined with overall energy and food price inflation, as well as the interest rate hikes needed to break out of inflationary trends – we shouldn’t ignore the demand-crushing impact of the impending recession.”

The COVID-19 pandemic is driving global energy demand yo-yo, with data from the International Energy Agency (IEA) showing a decline of more than 3 percent in the opening quarter of 2020, while the recovery sparked a revival with demand surging 6 percent in 2021. The IEA expects demand to pick up. by 2.4 percent this year, which is around pre-pandemic growth rates. However, rising prices could threaten the position of gas in the energy mix in the future. The IEA has forecast gas consumption to contract slightly in 2022, while there is a substantial downward revision to the outlook for commodity growth in the coming years.

“We see the risk of a permanent LNG demand collapse in some countries that could rely on coal and fuel oil and switch directly to renewable energy in the next few years. That is unless LNG at a more competitive price is immediately available to them,” said Ramesh.

Gopalakrishnan said the jump to renewable energy would be very important, especially for countries that lack coal reserves.

“Renewable energy has a low marginal cost and can reduce over-reliance on imported fuels,” he said.

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

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