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South and Southeast Asia to drive LNG demand growth

The region needs LNG to power developing economies

Power demand in South and Southeast Asia is growing at a blistering pace to meet the needs of its emerging nations. In recent years, coal has been the fuel of choice—being abundant and inexpensive—but this is at odds with the rise of sustainability, especially given growing concerns about climate change.

What are the alternatives? Renewables-based systems are attractive, but they are not always suitable for countries that face scarcity in terms of land use. Furthermore, renewable technology is still unable to fully substitute predictable baseload power generation.

Gas is increasingly seen as a necessary transition fuel toward a lower-carbon pathway—one that will not impinge on the region’s march toward economic progress. In 2019, South and Southeast Asia consumed a total of 50mn t of LNG. By 2040, IHS Markit forecasts the region will be importing 220mn t/yr (see Fig. 1), making up a third of global LNG demand.

This is a staggering figure, rivalling the largest LNG importers of today. And attracting substantial international capital into the region to invest in gas infrastructure will be needed for this gas future to materialise.

Innovative practices

A pivot towards gas is observable across the region. India’s use of gas is at only 6pc of its energy mix, and the government has consistently stressed a goal to raise gas use to 15pc.

We are at the generational crossroads where governments are making choices on their countries’ fuel mix for the future

Initiatives to promote market competition are underway. The launch of the India Gas Exchange on June 2020 provided a physical gas trading platform in one of the world’s largest gas markets. Greater liberalisation will facilitate entry of more buyers and sellers, which should also usher in a step-change in market sophistication.

New business models are also being pursued. In Indonesia, the 1,760MW Jawa-1 gas plant is the first integrated LNG-to-power project in Southeast Asia. Jointly developed by NOC Pertamina and Japanese conglomerates Marubeni and Sojitz, the project raised capital with multilateral institutions like the Asian Development Bank, the Japan Bank for International Cooperation and a score of other commercial banks.

Its success has spurred developers to pursue this integrated gas model across the region. Similar proposals are seen in emerging countries like Vietnam, Myanmar and the Philippines, indicating a willingness from private companies to sink capital into downstream infrastructure investments to support the development of new gas markets.

Myanmar is the latest country in the region to enter the LNG market, having imported its first cargo in June 2020. The LNG-to-power project was delivered in under 10 months by a newcomer, Hong Kong-based VPower, which had no prior experience in the LNG sector.

Confounding critics, it has been able to secure a power-purchase agreement with the government and LNG supply from Malaysian NOC Petronas in a relatively short period of time. While the project admittedly uses what is among the less efficient gas engines to generate power, it has undoubtedly shown the speed to market for gas-based solutions.

New entrants’ are creating opportunities in regions that have traditionally seen tortuously slow progress in LNG import projects. In another Southeast Asian example, Turkey’s Karpowership has sited a gas-fired power plant onboard a vessel currently operating off the coast of Belawan in Indonesia.

Cheap gas

Energy affordability is of utmost priority across the region. In 2020, average LNG prices delivered into South and Southeast Asia have fallen to $5-8/mn Btu. Asia’s spot LNG prices have been even lower, dropping below $2/mn Btu at their trough due to abundant global supply.

This is a far cry from the double-digit figures required to purchase LNG just a couple of years ago. And this has consequently generated significantly increased interest from potential buyers in the region.

Across South and Southeast Asia, electricity prices range from $60-120/MWh, and current LNG prices are within a sweet spot for being highly competitive. Historically, there was potential for significant tension between the purchase price of LNG and low regulated power tariffs.

But this obstacle has reduced significantly over several years. Across almost all markets, governments have been steadily increasing power tariffs to reduce national subsidy burdens. And lower trending LNG prices have made the transition to gas ever more attractive.

On the other hand, societal stability remains a concern, and electricity tariffs have a direct impact on the purchasing power of individuals and businesses. Thus, price reforms must be introduced gradually.

For an accelerated transition to gas, price development is key. With most long-term LNG contracts still linked primarily to Brent prices, if there is a sharp rebound in the crude market, LNG prices could overshoot the fuel’s affordability band and derail fragile progress towards greater gasification. And while there remains discussion about a more widespread move away from oil indexation, it is unlikely that relatively conservative renewing and new term buyers will be willing to push for radical change.

220mn t/yr – South and SE Asia forecast LNG demand by 2040

LNG suppliers need to be aware of this affordability risk. They have the financial means and capability to accommodate buyer concerns. Undoubtedly, this will require greater effort and adoption of a higher risk profile on the sell side.

But the rewards should be rich. We are at the generational crossroads where governments are making choices on their countries’ fuel mix for the future.

If investments and credible solutions are forthcoming, South and Southeast Asia might embark on an LNG path that will push the region to a sustainable cleaner development roadmap that can still support economic growth. And LNG suppliers that do engage will find a receptive and potentially lucrative market that will grow into a key outlet for their portfolios.

Chong Zhi Xin is Director–Gas, Power and Energy Futures at IHS Markit

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