Energy security – from Asia to Europe

Following Russia’s invasion of Ukraine, European countries that are heavily dependent on gas from Russia have vowed to reduce their dependence phase-wise.

In the short run, certain EU member states, including German, Italy, Netherlands, and Austria are shifting back to coal to fire their power plants. This will not only be a setback for global decarbonization goals but also exacerbate the energy crisis in developing economies that are finding it hard to procure the otherwise cheap sources of energy, LNG and coal. And as the European region starts firing power plants with coal, it will place pressure on global coal supply as well, leading to a further spike in coal prices.

Asian economies are already struggling to procure LNG as Europe is moving to replace Russia’s gas with it and is ready to pay a significantly higher price that most developing economies cannot afford.

According to Bloomberg Intelligence, global LNG supply in 2022 is expected to be around 455 million tons, out of which around 318 million tons is already contracted under long-terms contracts and only 136 million tons will be available in the spot market. The EU requires only 118 million tons of LNG to entirely displace the Russian pipeline gas. So, from the European perspective, there is enough LNG available in the spot market to completely replace Russian gas, but the region has only around 24 import terminals that can handle 65 million tons of additional LNG. Hence, despite the availability of LNG in the spot market, the EU will not be able to reduce dependency on Russian gas -- at least in the short run.

Will Russia be able to pivot away from Europe towards Asia? The simplest answer to this question is that in the short run, it will not be possible for Russia to increase natural gas supplies to Asia in a manner that it compensates for its sales to the European market and ease globally supply constraints. Russia’s natural gas sales to Asia amounted to 33 billion cubic metre (bcm) in 2021 whereas it exported 160-200 bcm of natural gas to the European market in the same period.

Two-third of the natural gas that Asia receives from Russia is in the form of LNG, and the already existing LNG plus pipeline infrastructure in the region does not allow Russia to expand its gas exports to Asia beyond 80 bcm, including pipeline gas and LNG.

The Russian economy has so far shown resilience against sanctions from Western powers. The Russian rouble is strengthening and is currently at a two-year high against the euro and the US dollar. Russia’s revenues from energy exports have significantly increased despite lower volumes because of a spike in the prices of oil and gas.

Sanctions were imposed on Russia soon after it invaded Ukraine, and it took remedial measures to protect the economy from crashing. The lending rate was initially increased to 20 per cent to protect the currency from devaluation, followed by measures to prevent capital flight.

The Ukraine-Russia war has resulted in a significant increase in the energy import bill of countries; this has affected developing Asian economies which were already reeling from the impact of Covid-19. Power outages in Pakistan reached 10-12 hours in urban areas and 14-16 hours in rural areas in May and June due to a decline in electricity generation from hydel resources and LNG. Also, as the input fuel prices rose to unprecedented levels, it has exhausted the working capital of power plants. There are also some delays in payments from the Central Power Purchasing Agency (CPPA) – the market operator -- leading to a decline in the plant load factor of power plants.

Sri Lanka recently defaulted on foreign loans and is now struggling to pay for food, medicine and fuel supplies. The country owes around $700 million to fuel suppliers and is currently negotiating a bailout package with the IMF. Similarly, Bangladesh, which was heavily reliant on natural gas for power generation (44 per cent share in the capacity mix), is finding it hard to supply power to consumers.

India’s trade deficit has widened mainly due to a high crude oil import bill and stood at around $26.18 billion in June 2022. This is putting pressure on the Indian rupee which is losing value, and the situation is expected to get further complicated in coming months when the external debt repayments of around $267 billion are due.

Although oil prices have dropped to under $100 per barrel owing to recession fears and a rise in Covid-19 cases in China, the demand and supply gap continues to exist. The US and its allies are mulling to form a cartel and place a price cap on Russian oil, low enough that it would keep Russian oil production profitable while simultaneously reducing margin. The potential cartel plans to use the price cap mechanism to reduce inflation in their countries, but it runs a risk of pushing crude oil beyond $150 per barrel.

There are legitimate concerns that if the crisis persists, a Sri Lanka-like default may not be a one-off event in the Asian region where more than half of the human population resides. And if these economies look towards sanctioned markets, Russian, Iran and Venezuela, to meet their energy needs and do not observe the proposed price cap, they may get sanctioned by Europe and the US.

But this blackmailing at the hands of Western powers cannot go on for long as it is unsustainable on so many levels. This can hasten the transition to the post-West world order unless it is realized that Asian energy security is as sacred as Europe’s, if not more.

The writer is a research analyst based in Lahore. He tweets

@beingkamil and can be reached at: beingkamil@yahoo.com