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Taiwan’s useful LNG ally

Strengthening energy links between Taiwan and the US could impact on power dynamics in the South China Sea

The liquefied natural gas deal Taiwan's CPC Corp signed with US producer Cheniere Energy last week is a huge step in the east Asian nation's transition away from coal and nuclear power. But the focus on seaborne imports also throws a spotlight on the island's capacity concerns and geopolitical vulnerabilities.

The $25bn agreement will see Cheniere sell Taiwan 2m tonnes of LNG per year for 25 years from 2021. In 2017, Qatar dominated the import mix with 4.86m t/y, followed by Malaysia at 2.79m t/y and Indonesia with 2m t/y, according to customs data.

"From an energy security perspective, the Cheniere-CPC deal is a good one. It will provide Taiwan's state-owned energy company with a stable, long-term supply of gas and help expand the geographical sources of the island's LNG imports," Hugo Brennan, Asia analyst for risk consultancy Verisk Maplecroft told Petroleum Economist in emailed comment.

Taiwan, which relies on imported energy resources for 98% of its needs, is already the world's fifth largest LNG importer. But political leaders want natural gas to play a much larger role in the energy mix - from a 32% contribution this year to 50% by 2025 - the same year that its six nuclear reactors are scheduled to have been phased out under the "Nuclear‐Free Homeland" vision.

The programme was a key aspect of Tsai Ing-wen's winning presidential campaign in 2016, reflecting a popular movement against nuclear power sparked by Japan's Fukushima Daiichi nuclear disaster in 2011, and increasing political pressures over climate change and air pollution.

Politics vs reality

However, warnings over potential energy shortages suggest the transition period could be painful.

In March, the Legislative Yuan approved Taipower's request to restart a second reactor at the Kuosheng Nuclear Power Plant, after the state-run electricity firm warned that foreign investment and economic growth were at risk should stretched reserve levels be strained further.

The frailty of these capacity levels was highlighted by an island-wide blackout in August last year. Supply to the largest gas-fired power plant was accidentally shut down, causing a 4.4 GW plant to go offline. With insufficient reserve capacity to make up for the shortfall, more than six million households and hundreds of industrial users were impacted.

In the months before the blackout, reserve margins went as low as 2%, far below a country's typical 10 to 15% comfort levels.

Aiming to improve overall energy capacity, the Bureau of Energy has targeted a more than doubling of LNG receiving capacity to 32.7 million tonnes by 2025. The BoE has also written that LNG-fired power plant capacity needs to rise to 25.87 GW from just 15.25 GW two years ago.

CPC is planning to construct a third LNG receiving terminal capable of handling six million tons of the chilled fuel per year, while Taipower wants to build a fourth LNG import terminal and gas-fired power station it plans to build at Hsieh-Ho in northern Taiwan.

But the plans face major opposition from environmentalists that is increasingly threatening the projects' timeframes. In July, an environmental impact assessment committee rejected CPC's third terminal plans due to the potential impact on rare coral reefs and scalloped hammerhead sharks. Activists say Taipower's plans to expand the LNG port at Taichung jeopardize the endangered Taiwanese humpback dolphin.

Superpower supplier

The increased diversification in geographic origins of LNG also doesn't equal divergence in supply routes. More than 90% of Taiwan's LNG imports passed through the South China Sea in 2016, according to EIA figures. This reveals an over-dependence on a route that's vulnerable to the impacts of everything from typhoons to aggressive Chinese maneuvers such as war games , naval patrols and artificial-island creation.

In an energy position paper released in June , the American Chamber of Commerce in Taipei called on the government to assess the risks of increasing LNG imports to 50%, as they "might be negatively impacted by bad weather and military blockades".

However, while Verisk Maplecroft's fourth quarter 2017 Energy Security Index categorised Taiwan as "high risk" with a score of 3.42 out of 10 due to its "extreme" dependence on seaborne natural gas imports, the consultancy's Asia expert said the US is a useful energy ally in this respect.

"Shipments of LNG to Taiwan would be vulnerable to disruption in the highly unlikely event of a Chinese naval blockade of the island. However, the geopolitical risks associated with Taiwan sourcing LNG from the US are lower than most other import options", said Brennan.

While Beijing might choose to exert pressure on Taiwan's energy suppliers to curb exports during a Cross-Strait confrontation, Washington is less likely to succumb to such coercive behaviour as other LNG suppliers more dependent on stable relations with the Middle Kingdom.

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