As Russia turns off gas to Europe, LNG worry spikes

As Russia cut off gas supplies to Bulgaria and Poland yesterday for rejecting its demand to pay for gas in rubles, sending its toughest message to the West over the Ukraine conflict, the energy crisis for Europe is set to create a chain reaction in the world's Liquefied Natural Gas (LNG) market.

It's bad news for Bangladesh that has been importing LNG from Qatar – one of the world's top three LNG producers.

LNG is already considered a costly but necessary option for Bangladesh to safeguard its growth momentum. The developing scenario indicates that this gas would become costlier and scarcer in the coming days.

European nations, which saw about 25% surge in gas prices since the Ukraine war, have been crowding Qatar, looking for LNG supplies to replace the Russian gas. Qatar said it cannot replace Russian gas – but it can, at best, divert 10% to 15% of its existing LNG shipping volumes to Europe, according to Reuters.

The two other top LNG exporters – the USA and Australia – also cannot assure a quick solution to replace Russian gas as they are exporting most of their productions under long-term contracts and they are currently producing at their full capacity.

But this extra demand is making QatarEnergy consider further increasing its North Field expansion project being undertaken at a massive cost of $30 billion to increase Qatar's annual production capacity from 77 million tonnes to 126 million tonnes by 2027.

Until then, there will be a huge pressure in the LNG market and accordingly it will push up its cost.

Besides Europe, Asia itself is a big consumer of LNG. Japan and China are large-scale buyers and the Indian subcontinent is the upcoming big customer.

According to the Economist, China's imports grew by 82% between 2017 and 2020 and last year it overtook Japan as the world's biggest importer.

Around 70% of LNG traded globally is on contracts that run for 10 years or more. Europe tends to rely on spot markets and shorter contracts. In the past, that had allowed Europe to take advantage of low prices when there were enough supplies – but now it has left Europe at the mercy of the market.

But one thing is for sure, some LNG shipments would be diverted to Europe because of the rising demands. There will be a supply shortage and there will be price hikes like never before.

Bangladesh between a rock and a hard place

For Bangladesh, LNG was considered as an expensive option a few years back. But given its dwindling gas supplies and booming economic growth, the government risked the option and sealed a 15-year deal with Qatar in 2017 to supply 2.5 million tonnes of LNG from 2018. Till January this year, Bangladesh has purchased 8.424 million tonnes of LNG.

The Bangladesh Energy Regulatory Commission and the Power Sector Master Plan (PSMP) 2016 projected that the production from local gas fields would drop below 1,000 million cubic feet (mmcf) by 2041, when the country's total gas demand would be around 6,000mmcf per day.

Therefore, the demand and supply gap must be filled with LNG imports. The PSMP forecasted that the share of LNG in the total supply will increase to 40% in 2023, 50% in 2028, and 70% in 2041.

Today, it appears Bangladesh has just enough gas for less than 10 years even if its gas demands stop growing.

Accordingly, the government went for signing deals with Qatar.

Considering future gas supply uncertainties, Prime Minister Sheikh Hasina Monday requested Qatar's new ambassador to Bangladesh to extend the contract for a longer term. Bangladesh also sought more LNG.

The country has already proposed Qatar to increase its LNG imports by another 1 million tonnes a year.

In February last year, a separate agreement was signed between Qatar and Dutch energy giant Vitol for providing Bangladesh with 1.25 million tonnes of LNG per annum.

Dhaka is on its way to become a top LNG importer in Asia, joining India and Pakistan. In 2019 alone, Bangladesh imported 3.89 million tonnes of LNG under separate long-term contracts with Qatargas and Oman Trading International.

Asia has been Qatar's highest market in the energy sector.

India was the top destination for Qatari LNG shipments in January after it received more than 1.2 million tonnes. It was followed by China at around 1 million tonnes, South Korea with roughly 6,61,000 tonnes, and Pakistan with 5,04,000 tonnes.

Qatar last year supplied 110 billion cubic metres (bcm) of gas.

Europe's plight

According to Reuters, Europe received 40% of its gas supplies from Moscow – with almost a third of the shipments passing through Ukraine. Last year Russia supplied around 155bcm with 52 bcm going via Ukraine or nearby routes.

US President Joe Biden has imposed a ban on Russian oil and other energy imports and Britain said it would phase out imports through the end of 2022. The EU said it wants to cut Russian gas by two-thirds this year and end reliance on Russia well before 2030.

The European Commission said gas and LNG from countries like the USA and Qatar could replace 60bcm of Russian supplies.

It suggested various measures to reduce gas dependence by reducing thermostats by one degree to save 10bcm this year and turning to electricity imports via interconnectors.

The USA said it would work to supply 15bcm to the EU this year – but it did not specify what amount of this supply would actually come from the USA. The American LNG plants are already producing at full capacity and analysts say most of any additional US gas sent to Europe would be exports redirected from somewhere else.

Another top LNG producer Australia has said 75% of its production is based on long-term contracts and it cannot provide Europe with LNG without breaching the contracts.

Following the Ukraine invasion on 24 February, Qatar was approached by Austria, Italy, Germany, the UK, and France in an effort to reduce their reliance on Russian gas.

Qatar had stressed that it will not be able to replace Europe's energy supply in the event of a possible Russian invasion of Ukraine but could possibly divert 10%-15% of its LNG shipping volumes.