Asia's near-term LNG demand stunted by fuel diversification in power sector

When signs emerged in early 2022 that Russian pipeline gas supply into Europe could disappear and force Asia's LNG importers to fight for every molecule, Asian governments and power utilities made a strategic move to ramp up every other alternative fuel source available.

This included nuclear power, renewables, coal and furnace oil, and prioritizing domestic production of coal and natural gas. The fuel supply was bolstered by reviving mothballed power plants, delaying decommissioning of old facilities and in some cases eliminating demand from non-critical sectors.

More than a year later, the collective outcome of these measures has been to blunt the dependence of Asian utilities on LNG, mainly in the power sector, and keeping spot LNG prices stable. More importantly, these moves are helping regional utilities maintain stable grids in the midst of sporadic heatwaves sweeping various parts of Asia in recent months.

Cheaper and more viable fuel sources also reinforced emerging market claims that LNG remains an expensive energy source in regions like South Asia and Southeast Asia despite softer prices seen in 2023, and that substituting coal with gas in the long term is not just a pricing challenge but a wider energy security issue.

So far, LNG traders and importers still expect peak winter demand to be both the sweet spot and the wildcard for LNG demand and prices, when the remaining fuel sources will be insufficient to meet the spike in demand.

Regional variations

The lack of a steeper uptake of LNG in Asia despite lower prices also needs to be analyzed in the local context.

In North Asia, mainly Japan, Taiwan and South Korea, LNG is not unaffordable, and buyers like Japan have been willing to pay exorbitant prices for fuel during national emergencies like the Fukushima crisis to keep the lights on.

However, Japan and South Korea have embarked on a significant ramp up of renewables and nuclear power. Japan's share of power generation from renewables has doubled to around 12% from just 6% in 2017, according to data from S&P Global Commodity Insights, and is still expected to grow.

Malaysia, Indonesia and Brunei are grappling with declining gas production but are also juggling LNG exports with growing domestic demand.

For the power sector in Peninsular Malaysia, from March to May, gas-to-coal switching of about 1 aGW year on year has brought coal-fired power generation close to capacity, Andre Lambine, senior analyst from S&P Global, said in a recent analysis.

For new LNG importers like Vietnam and the Philippines, prices are a decisive factor. In Vietnam, cheaper thermal coal is needed in 2023 to compensate for lower hydropower generation led by lower water levels, which have dropped 30%-40% year on year at hydropower dams in north Vietnam, a representative from PV Gas said.

India and China

India and China are two economies with a much larger scope for switching between gas and coal, although much of India's gas-fired power generation capacity remains underutilized due to high prices.

The two countries also responded to the Russia-Ukraine crisis with a huge ramp up of domestic coal production to manage fuel security, supplemented by coal imports.

"In Asia, the two-biggest coal importers India and China are more prepared for the heatwave this year to prevent a repeat of the 2022 power crisis," according to S&P Global.

"On top of robust domestic coal supply in India and China, both countries stocked up imported thermal coal early as output from Indonesia has been healthy and China has reopened the door to Australian thermal coal imports," S&P Global said in its July edition of International Thermal Coal Market Forecast.

"China doubled its thermal coal imports, while imports into India increased around 5% in the first five months of 2023," according to S&P Global.

"With lackluster economic performance in China this year, it is more economical to use coal for power generation in order to keep costs lower," a China-based analyst from a power utility said.

A trader said Chinese buyers would show interest in buying LNG at around $10/MMBtu, and the current LNG price was twice that of thermal coal in China, making coal a much more affordable option. Recent government announcements also indicate that China plans to rely on surplus coal to cater to peak power demand this summer, while hydropower will recover.

Future LNG uptake

Some of the measures to backstop fuel supply in the ongoing energy crisis will be temporary and may fade away once Europe's LNG supplies normalize, but others, such as the ramp up of nuclear power in Japan and South Korea, and the broader renewables push will be sustained.

This has several implications for LNG uptake in Asia, even at normalized LNG prices, according to market participants.

LNG demand in the power sector will have to be driven by regulations to replace coal, such as the Just Energy Transition Partnership financing for Indonesia and Vietnam, and where gas-based power can support peak shaving demand and as baseload for renewables.

The other key variable for LNG demand is in non-power and non-heating demand where it doesn't have to compete with coal, such as fertilizers, city gas distribution and transportation.