Asian countries evaluate oil and gas price risks, contingencies amid Ukraine crisis

The oil and gas ministries of Asian countries have been assessing the risk of surging fuel prices and supply disruptions due to the Ukraine conflict, and evaluating contingency plans in consultations with national oil companies and other energy firms.

South Korea is concerned about price hikes of crude oil and LNG due to the Ukraine crisis, an energy ministry official said Jan. 27, but has so far ruled out any major impact on supply chains because its purchases are based on long-term contracts.

The country's Ministry of Trade, Industry and Energy convened a meeting with the country's energy importers and energy-intensive manufactures Jan. 26 to discuss energy supply conditions over the Ukraine crisis, joined by state-run Korea Gas Corp., one of the world's biggest LNG importers, the country's main oil and gas developer Korea National Oil Corp, chip makers, offshore plants builders and major think tanks.

South Korea, the world's fifth-biggest crude oil buyer and the world's third-biggest LNG buyer, is vulnerable to price hikes because it imports all of its crude oil and LNG requirements.

"The participants expressed concerns about price hikes of crude oil and LNG, with the forecast of possible supply disruptions due to the Ukraine crisis," the MOTIE official said. "Energy prices are expected to get stronger even without armed conflicts there."

The prolonged tension could push up prices of oil and other types of energy, and a possible armed clash and subsequent US sanctions against Russia could disrupt global trade and supply chains and have far-flung implications across the globe, leading to supply disruptions of LNG and oil, he said.

"The government will operate an early warning system on the supply of key industry materials and energy resources, while closely monitoring the situation," Vice Industry Minister Park Jin-kyu told the emergency meeting. "We will be fully prepared while bearing the worst-case scenario in mind."

In Australia government officials said there has been no formal request from the US to ramp up LNG supply for Europe, but said Australia stands ready to support its allies and that banks should continue to invest in the gas sector.

South Asia impact

Indian LNG importers ruled out any immediate fallout on gas supplies as the Ukraine transit point is meant for Russian gas supplies to Europe, oil ministry officials said Jan. 27, allaying fears of any short-term supply crunch if tensions escalate.

"There won't be any gas supply constraint as Russia is our most dependent friend," a senior ministry official said.

Officials said a possible war-like crisis between Russia and Ukraine would not make supplies to India costlier as the global price depends on supply and demand factors, and US LNG producers have been producing while the winter season in Europe is set to subside.

"We expect the global price to ease after March by when the winter season in Europe would be over," an official at Petronet LNG, India's largest state-run LNG importer, said.

Indian LNG buyers in the private sector echoed the sentiment of state-owned LNG importers like Petronet, with an executive at H-Energy saying Russia or Gasprom are not expected to cut off gas supplies.

He said cutting Russian supplies would starve Europe of gas and the punishment would be harder on Europe than on Russia. "It's still a wait and watch the game," the executive said. H-Energy is developing over 1,000 km natural gas pipelines to connect its LNG regas terminals on the west and east coasts to downstream gas markets.

Unlikely scenario

"While our base-case remains that disruptions are unlikely to occur, the price risk to exposed commodity markets is nonetheless skewed to the upside relative to 2014 given tighter inventory levels," Goldman Sachs said in a note to clients Jan. 26.

It said further escalation or a physical supply outage raises upside risks for European gas prices of Eur12/MWh given the still critically tight inventory situation.

Goldman expects the impact on oil prices to be modest at around $2/b given limited loss of un-reroutable pipeline volumes, with dirty freight markets likely to rally significantly instead, given the ability to redirect flows to the seaborne market.

"More broadly, commodity markets are increasingly vulnerable to disruptions, after a couple years of historically low outages following the initial COVID shock," the bank said, adding that the backdrop of the tightest inventory levels in decades, low spare capacity and a less elastic shale sector "points to the skew of large energy price moves shifting to the upside."