Asia's energy supplies, prices face uncertain future as EU's boycott of Russia takes shape

The European Union's decision to end its dependency on Russian natural gas, as it moves towards a boycott of energy imports from the country, has set into motion a chain of events long dreaded by policymakers and industry leaders alike.

At recent conferences in the Gulf, they warned of severe ramifications for global energy supplies that could not only threaten economic growth and political stability in middle and low-income countries, but also set back efforts to battle climate change.

EU leaders moved this week to ban Russian coal imports, after agreeing last month to look for alternative suppliers of natural gas - with Washington committing to help the bloc plug its gaping supply-demand gap. Discussions are also under way on restricting oil imports. Since the war in Ukraine began, the EU has paid €35 billion (US$38.1 billion) for Russian energy, the bloc's top diplomat, Josep Borrell, said this week.

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Russia is the top provider of coal, natural gas and crude oil to the EU, but as its members cast around for alternative sources, countries with natural gas reserves and their multinational partners say they are simply not in a position to help any time soon.

"Year on year, we've been saying we need more investments in oil and gas - we need more resources, we need more diversity," said Suhail al-Mazrouei, energy minister for the United Arab Emirates, at an industry event in Dubai late last month.

Financiers have faced pressure to cut back on fossil fuel funding as part of a commitment to fight climate change, touching off a global debate on the need to ensure stable supplies and prevent price shocks amid the transition to cleaner energy.

Mazrouei said energy producers now found financial institutions "hesitant" to back many oil and gas projects, even as "everyone is saying, 'raise your production, bring more resources'".

The lack of spare oil-production capacity has also been highlighted by the Paris-based International Energy Agency, which previously advised investors not to fund new fossil fuel projects so that net-zero emissions are achievable by the middle of this century.

An estimated US$200 billion of additional annual investment in oil and gas production is needed to keep pace with demand until 2030 and replace lost production capacity of some 5 million to 8 million barrels per day.

Investment shortfalls mean many among the 14-member Organization of Petroleum Exporting Countries, particularly those in Africa, are unable to meet oil production quotas that are set in coordination with Russia and the nine other nations in the Opec+ grouping, which was formed in 2016 to exercise greater control over the global crude oil market.

The United States - the biggest producer outside this group - has calculated that global markets are currently undersupplied by about 2 million barrels per day. Washington has asked the country's oil producers to increase daily output by 1 million barrels during the second half of this year.

Existing production shortfalls among Opec members amount to more than 1 million barrels per day. Yet Saudi Arabia and the UAE - the only Opec members with spare capacity - have rejected pleas from US, European and Asia-Pacific governments to increase their output.

With the EU searching for 160 billion cubic metres (bcm) of natural gas a year to replace Russian supplies - which account for 40 per cent of the bloc's consumption - and global oil demand expected to keep growing, how global energy markets will be reshaped has come into sharp focus.

US liquefied natural gas producers exported 22 bcm to the EU in 2021 to meet shortfalls created by Russia's refusal to supply sufficient gas for storage ahead of the winter peak-demand period. They have also committed to shipping an additional 15 bcm this year, on top of what has already been supplied, which is equivalent to about 10 per cent of Russian exports to Europe.

"The US is the only LNG producer with significant near-term growth from projects under completion, so it's crucial in helping replace Russian gas," said Robin Mills, an analyst who runs the UAE-based consultancy Qamar Energy.

The US State Department's energy envoy, Amos J. Hochstein, hinted last week that Washington would continue to work with leading LNG producers such as Qatar and Australia, as it did "in December, January, and early February", to redirect cargoes to Europe from allies such as Japan and South Korea.

Meanwhile, President Joe Biden's administration is leaning on US energy companies to start work on the 12 LNG projects that have regulatory approval as it aims to increase exports to Europe to 50 bcm by 2030.

But US energy firms, like their overseas counterparts, remain wary of committing to the requisite multibillion-dollar investments amid extreme volatility in the gas markets. And even those projects that do move ahead will still take five years to bring significant volumes of LNG to market.

Decisions to spend big on dedicated gas infrastructure would also require the EU to commit to 20-year long-term contracts, which may prove difficult since Europe's gas requirements are widely expected to dip after 2030 as more renewable energy supplies come online.

Hochstein said the US would encourage Europe's neighbours in the Middle East and Caspian Sea regions to increase supplies via pipelines.

"We are all looking at literally every single place around the world, both in their demand to see if that can be reduced as well as in the production side and the delivery side, to see if that can be expanded for Europe," he said at an energy conference in Dubai hosted by the Atlantic Council, a Washington-based think tank.

UAE-based analyst Mills said "the best medium-term prospects for Europe" were LNG from the Middle East and gas from fields in Azerbaijan delivered by pipelines through Turkey.

"But they still need time and have major political complexities," said Mills, who is also a non-resident fellow at the Arab Gulf States Institute in Washington.

Azerbaijan's access to additional reserves was ensured by the resolution last year of a dispute over Caspian Sea borders with Turkmenistan, which exports its existing output to China.

However, the threat of neighbouring Russia looms large: just days before the invasion of Ukraine, Azerbaijani President Ilham Aliyev signed an agreement with Vladimir Putin specifying that neither country would act against the energy interests of the other.

Iran, another Azerbaijan's neighbours, has the world's second-largest natural gas reserves after Russia. But the further development of its gas fields is subject to a final agreement being reached in talks aimed at reviving the 2015 Joint Comprehensive Plan of Action, or nuclear deal, which collapsed in 2018 after Donald Trump pulled the US out.

Tehran also has reservations about its nemesis Israel and its alleged involvement in the development of gas reserves in Iraqi Kurdistan for export to Turkey.

Even if the nuclear deal is revived, Mills said international investment is likely to be "slow and halting and viewed with suspicion and obstructionism from parts of the Iranian system".

"While Iran might moderately boost exports by pipeline to Turkey, and perhaps even start up some modest LNG sales, by 2030, it will only be a small part of Europe's solution to the Russian problem."

Algeria could "add a few bcm" to its output, Mills said, but most African producers are already operating at full capacity, which is unlikely to change until the completion of a Nigerian project in 2024.

Egypt could increase LNG exports through under-utilised plants, he said, but would be reliant on importing natural gas from Israel to replace its dwindling domestic production.

Undersea pipelines have also been proposed from Israel to Turkey, and to Greece. But the former would require a major improvement in bilateral relations, while the US expressed misgivings about the latter in January on economic and environmental grounds.

Mills said Gulf LNG producers were also operating at full capacity, and would be until Qatar and the UAE completed expansion projects over the next three to five years.

In the meantime, "diversion of available cargoes will still be important - at a price", Mills said.

As the world's biggest importers of LNG, Asia's economies will have to compete with the EU for supplies from the Gulf and the US.

Tight markets for natural gas have already created energy shortfalls, with Asian countries reporting skyrocketing electricity prices, India facing blackouts and China seeing power shortages.

For cash-strapped emerging nations in South Asia, high prices mean the government may be forced to curb electricity or fuel oil supplies to households. Power plants in Pakistan are already running out of fuel and have been pleading with the government to make more supplies available, according to local reports. As prices remain elevated, fuel shortages are at risk of spreading to Bangladesh, India and Thailand.

"Energy poverty in parts of Asia could result as Europe sucks LNG cargoes away from their originally intended destinations," said Saul Kavonic, an energy analyst at Credit Suisse Group AG.

US LNG flows have shifted away from Asia - usually the top destination - and towards Europe, a trend that's expected to intensify this summer as the two continents are forced to fight over every last molecule available on the spot market. China and Japan have already started signing new supply deals, Bloomberg reported.

High prices fuelled by Europe's gas transition will also divide Asian economies into two camps.

"LNG prices are very high and will stay high, presenting challenges to Japan and South Korea. They will step up nuclear and renewables," Mills said. "Other Asian economies - China, India and Pakistan - will probably slow the move to LNG and remain on coal or fuel oil."

The EU's decision to ban imports of Russian coal has also raised concerns of increased competition in the rest of the world.

Miners in Indonesia, the top shipper of coal for power stations, have been approached by some potential buyers from European countries including Italy, Spain, Poland and Germany, said Hendra Sinadia, executive director at the Indonesian Coal Mining Association.

It is unclear if suppliers will be able to boost deliveries as they have limited spare capacity and are mandated to first prioritise local demand. Producers in Australia, another key exporter, have flagged that they have limited ability to raise sales to Europe.

"A lack of investment in new capacity, and relatively strong demand in Asia, leaves the market short of filling any gap left by cuts to Russian exports," ANZ Group strategists Brian Martin and Daniel Hynes wrote in a note on Wednesday. Russia accounted for about 18 per cent of global exports in 2020, they said.

Mazrouei, the UAE's energy minister, said all stakeholders needed to work together to make energy more affordable.

"Basically, we need to be courageous to tell the consumers your bill is going to be doubled or tripled in the future if we don't do anything about it," he said. "That is problematic, because it means starvation for many nations and that means we are going to have more problems than the geopolitical problems that we are [already] seeing."

Frederick Kempe, president and CEO of the Atlantic Council, said Europe's energy disruptions had sent a global message that there were insufficient hydrocarbon resources and investments, while renewables were "too slow in development to satisfy an energy-hungry world in the middle of a transforming energy system".

Amid supply risks and the reshaping of global demand, this put the post-pandemic global economic recovery at risk and endangers the politics of clean-energy transition, he said.

"What's at risk, either by distraction or by destabilisation, is the global cohesion necessary to realise the urgency of global climate action in a net-zero emission world," Kempe said.

Additional reporting by Bloomberg

This article originally appeared on the South China Morning Post (SCMP).

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