Taiwan vulnerable to LNG supply risks in the event of a maritime blockade

Taiwan is highly vulnerable to LNG supply disruptions in the event of a maritime blockade due to its heavy reliance on LNG for power generation, storage constraints, and a policy to dial back on domestic nuclear power generation, according to gas industry executives and market participants.

Taiwan meets most of its energy requirements through imports, including petroleum, gas and coal, but the LNG supply chain in particular is thinly stretched, and several market participants expect LNG to be one of the first to collapse if an actual blockade were to happen.

The risks have also led to LNG suppliers in Singapore's trading hub to put in place contractual terms and conditions such as force majeure and "act of war" provisions, if they are unable to deliver cargoes and have to seek alternative buyers at the last minute, lawyers said.

Taiwan consumed around 24.7 Bcm of LNG in 2023, of which 20.6 Bcm, or 83.4%, of demand from the power generation sector, data from Taiwan Energy Administration, Ministry of Economic Affairs showed. It was also among the top 10 LNG importers in the world in 2023, drawing in 99% of its gas needs.

The island's gas-fired power generation accounted for 39.6% of total power generated in 2023, while power generation from coal, renewables, nuclear, oil and hydro accounted for 42.2%, 9.5%, 6.3%, 1.3% and 1.1%, respectively, according to the government data.

Taiwan plans to raise the share of gas-fired power to 50% of the electricity mix by 2025, which means higher dependence on LNG imports.

Meanwhile, nuclear generation nearly halved from a record-high level of 42.4 TWh in 2014 to 23.8 TWh with 94% utilization in 2022, according to S&P Global Commodity Insights. As of March 2023, 10.8 GW gas-fired power capacity was under construction to fill in for coal and nuclear capacity retirements, the data showed.

Exercise joint sword

The Eastern Theater Command of the Chinese People's Liberation Army (PLA) conducted Exercise Joint Sword encircling Taiwan on May 23-24 to "practice a new mode of blockading Taiwan," China's state broadcaster CCTV reported last week.

"Taiwan is an isolated island, suspended in the sea with weak self-sufficiency. Taiwan's economy is export-oriented, and most of its energy consumption relies on imports. Once besieged and blockaded, it can easily lead to economic collapse and social unrest," CCTV reported, citing Chinese military expert Zhang Chi as saying.

The PLA's military drills in the sea and air were conducted north, south and east of Taiwan. Exercises in the south are crucial for the blockade, targeting Taiwan's largest port Kaohsiung, an important base for the navy, while drills to the east are designed to practice cutting off energy imports, Zhang said.

Taiwan currently has two LNG receiving terminals -- the 12 million mt/year Yung-An LNG terminal in Kaohsiung and 6.5 million mt/year Taichung LNG terminal on the west coast, both operated by the state-owned China Petroleum Corp. (CPC).

"Once the island is blockaded, its natural gas supply is not expected to sustain for more than two weeks," a gas industry executive in China said. It wasn't clear whether Taiwan has a firm strategy to counter a blockade and keep the lights on.

CPC was not reachable for comments, and Taiwan's Energy Administration did not respond to emailed queries.

According to its Ministry of Economic Affairs, Taiwan's buffer stock of natural gas covers 10 to 11 days, while coal is about 39 days and oil is about 146 days. The low inventory buffer for natural gas is an industry-wide problem as the fuel that can't be stored in vast quantities for long periods of time without being lost to atmospheric evaporation called boil-off, and storage infrastructure is also expensive.

This has led to LNG supply chains getting too stretched too easily. In March, Japan's largest power generation company JERA briefly imposed rare large-scale fuel usage restrictions at its gas-fired power plants in Tokyo Bay due to a combination of LNG inventory falling to the lowest level since January 2021, a short sharp burst of cold weather and delays in LNG carrier arrivals due to unfavorable weather conditions.

The lack of LNG supply contingency plans and storage capacity exacerbated the problems, and demonstrated the inherent weakness of LNG reliance power systems.

More LNG dependence

Taiwan imported 19.92 million mt of LNG in 2023, with Australia, Qatar and the US being the top three LNG suppliers accounting for 40.2%, 27.9% and 9.8% of supply, respectively, the government data showed.

It plans to add three new LNG receiving terminals -- CPC's 3 million mt/year Guantang LNG and Taipower's 1.8 million mt/year Hsieh-ho LNG terminal in the north, and Taipower's 3 million mt/year Taichung LNG terminal in the west.

In addition, CPC plans to further expand its Yung-An, Taichung and Guantang LNG terminals in future, adding LNG receiving capacity of 500,000 mt/year, 5 million mt/year, and 3 million mt/year, respectively. CPC is also planning a new 6 million mt/year LNG terminal in Kaohsiung.