The recent fluctuations in the price of liquified natural gas (LNG) have challenged previously held notions of the industry experts. Instead of following the predicted trajectory, the market has taken a surprisingly different turn.
Last year in September, during Ukraine Russia war it was widely predicted that LNG price is going to skyrocket in winter as Russia announced they will lessen the gas supplied to Europe to just 20% of the agreed-upon volume. 40% of total gas consumed in Europe come from Russia and without the supply from Russia, it was inevitable that LNG price is going to hike but proving most the hypotheses wrong, on the first day of trading for the year, the TTF hub in Europe saw a drop in its benchmark price to a level not seen since February 21, 2022.
Data source: investing.com
What led to the drop in the price?
The price drop can be attributed to a combination of widespread conservation effort, use of alternative sources and lower demand due to mild weather.
During last summer, Europe found itself in a bit of a predicament when its primary supplier of natural gas, Russia, suddenly reduced its flow of the resource. In response, governments and businesses across the continent took action to stock up on gas and fill storage facilities to near capacity. As of early December 2022, Europe's gas storage levels were about 92% full and the gas storage levels in most EU countries are well above their five-year average.
To round up alternative sources, Europe secured LNG shipments from the United States, Qatar and other exporters. As per September 2022 stats, the largest LNG exporters to the EU were the United States (44%), Russia (17%) and Qatar (13%). The United States is playing an increasingly important role in the EU gas supply.
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Data source: Eurostat
At the same time, demand for natural gas as a power source has fallen 20.1% compared to the average consumption for the same period in the years 2017-2021, due to mild winter, further pulling down prices. All of these factors combined have led to a decline in natural gas prices.
Winter is not over
Winter has only just started, and the circumstances can change before it ends. Companies in Europe may choose to boost industrial production due to current lower prices. Such push from the demand side can trigger a price increase. The economy of other countries might affect the demand side as well. The demand from China was lower last year owing to their bruised economy due to Covid. China National Offshore Oil Corp has forecast that China's natural gas imports will be 7% higher year on year in 2023. According to Meg O'Neill, CEO of Woodside Energy Group, China's economic rebound might keep the natural gas market tight this year. China's LNG imports, which declined owing to the virus policy last year, are anticipated to increase this year. Nonetheless, the LNG market is unpredictable when factors such as Chinese economic activity are considered. A strong rebound in Chinese demand could tighten the market and increase gas prices.
As the winter is not over yet, and a cold spell could happen even as late as March. A few weeks of colder-than-usual temperatures in Europe could use up the stored natural gas. Goldman Sachs anticipates that storage facilities will be at least 20% full by the end of March 2023, whereas Wood Mackenzie predicts that an extremely cold winter in the Northern Hemisphere could lower European gas inventories to 4% of total capacity by the end of March. If this happens, the prices will go up.
The Bangladesh perspective
In the first week of 2023, the average price of LNG for delivery to northeast Asia in February was $25 per million British thermal units (MMBtu). According to estimates from industry sources, this is 10.7% less than last week.
When LNG price is on decline in most part of the world including Asia, the technical evaluation committee of the Bangladesh Energy Regulatory Commission (BERC) had proposed an increase of 15.43% in the retail price of power. The proposal was raised by six state-owned power distribution bodies who are undergoing a financial loss which will add up to Tk 48,000 crore in the 2022-23 fiscal year. The financial loss has increased 67% from last fiscal year which triggered such proposal. The cut in subsidy in the power sector can be a major reason of the tremendous financial loss the power distribution bodies are facing.
Finally, responding to the appeal of power distribution bodies, on 11th January government raised the electricity price by 5%, making the tariff charge Tk 7.49 per kilowatt-hour. As per the power, energy and mineral resources ministry, this new rate will be applicable from February, 2023.
The following week of power tariff hike, on 18th January piped gas price increased by a staggering 179% in four consumer categories effective from February.
Data source: The Business Standard
For the businesses it came as a shock before they could wrap their head around the power price hike. Jasim Uddin, president of the Federation of Chambers of Commerce and Industries (FBCCI), said, "We request the government to defer the date until April for the new gas tariff."
This hike can potentially affect the business competitiveness of most of the industries given that even after the gigantic leap in the price uninterrupted supply of gas has not been promised by the authority. According to Petrobangla data, the country's overall natural gas supply is currently around 2,717mmcfd, with re-gasified LNG at around 480mmcfd, while total demand is around 4,000mmcfd.
On a positive note, the fund from the increased tariff will be used to resume LNG import according to Petrobangla Chairman Zanendra Nath Sarker. He also said the government is opting to increase the supply of re-gasified LNG by around 45.83 per cent to around 700mmcfd from the current level of 480mmcfd.
The “coal” side of the story
The ongoing dollar crisis is preventing coal from effectively contributing to solving the power problem, despite its potential to do so.
The Payra power plant in Bangladesh is facing potential closure due to a shortage of coal. The primary cause of this shortage is a lack of dollars to pay for coal import bills. The main reason, the Bangladesh-China Power Company Limited (BCPCL), which owns the plant, being unable to open new letters of credit to import more coal from suppliers as it already has a large amount of unpaid coal import bills. The Payra and Rampal power plants are the country's two largest coal-fired power plants, which rely on coal imported from Indonesia. If these plants were to close, it could lead to severe power shortages in the south-western part of the country and in the capital. These plants require around four million tonnes of coal each year to function at full capacity, however, due to the dollar crisis, banks are refusing to generate the necessary bills despite repeated requests.
Can Fuel be the solution?
The Bangladesh Independent Power Producers Association (BIPPA) has proposed increasing the use of heavy fuel oil (HFO) or furnace oil-based power plants to meet the demand surge next summer and save foreign currency used to import costly liquefied natural gas (LNG). The move would save the government around Tk16,568 crore. According to the BIPPA, the government would only need to invest Tk17,672 crore to produce an additional 26% of energy, or 11,045 million kilowatt-hours per hour (kWh), as opposed to the Tk34,240 crore required when using spot LNG for the same purpose.
In this regard, experts have said that authorities must analyze the cost of different fuels before accepting such proposal, as the fuel cost of a furnace oil-based plant must be compared to coal-fired plants, which may be cheaper if the price of coal goes down in the global market but considering the dollar crisis constraint of coal fuel-based power can be a viable solution.