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Twin woes for Asia gas demand - slowing economies, plenty of fuel oil

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Twin woes for Asia gas demand - slowing economies, plenty of fuel oil

Highlights

China, India face growth headwinds, threatening energy consumption

Asia gas demand to grow, albeit at a slower pace than previous years

Some South Asian countries may find fuel oil supplies attractive

Singapore — An anticipated softer approach by some Asian governments in pushing coal-to-gas switching because of feeble economic growth and rising fuel oil supplies due to stricter shipping fuel norms may cast a shadow on the region's appetite for gas, analysts told S&P Global Platts.

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Commodities 2020 | S&P Global Platts

While Asia's biggest energy consumers struggle due to slowing growth -- China is witnessing its slowest GDP growth in decades and India's economy is facing headwinds -- the argument to speedily replace coal with relatively expensive gas under the current economic climate is a tough sell for policy makers.

This could result in Asia's appetite for gas facing headwinds in the near to medium term, contrary to robust growth than analysts were expecting earlier.

"No end in sight for Asia-Pacific's growth slowdown. China says goodbye to growth above 6% as policymakers show welcome restraint. India's soft patch should firm but slowly. Japan's resilience will be tested by the global slowdown," S&P Global Ratings said in a recent research note.

In Japan, for instance, there was a year-on-year decline in power demand for July, caused by milder-than-normal temperatures and lower than expected GDP growth. As a result, demand for gas in power generation dropped 48 Mcm/d from a year-ago levels, while demand for coal barely changed in that period.

"This is a good example of coal's resilience in Asia's power industry, especially in deregulated markets where providers of low-cost electricity are expected to gain market share," said Andre Lambine, senior power analyst at S&P Global Platts Analytics.

Thermal power plants - Asia

SLOWING ECONOMIC GROWTH

After several years of strong growth, Asian LNG demand is expected to grow by less than four million mt to 240 million mt in 2019, according to Platts Analytics, less than the 20% average growth seen in the region over the past three years. This slower growth is a consequence of slowing economic activity, higher nuclear output in Northeast Asia and mild temperatures.

Asian LNG demand is expected to grow another 20 million mt in 2020 despite concerns around economic activity slowing, said Jeff Moore, manager, Asian LNG Analytics at Platts Analytics. At 8% growth, it will still be a lower growth seen over past three years.

However, some analysts added that while overall consumption of gas could witness some slowdown in major Asian consumers, governments would still pursue efforts on coal-to-gas switching because of environmental concerns.

"We see slower economic growth playing out in reducing aggregate demand for gas. These effects are probably most visible in the slowdown in Chinese gas demand growth this year," said James Waddell, senior global gas analyst at Energy Aspects.

In the first nine months of 2019, China's natural gas demand rose 10.3% year on year, according to the National Development and Reform Commission, slower than the 18.2% growth seen in the corresponding period last year.

India's overall gas consumption -- including domestic supplies and imported LNG -- was at 5.2 Bcm in September, the lowest level in four months, according to the Petroleum Planning and Analysis Cell.

"Issues such as energy security, diversification of supply, and environmental concerns, will continue to support gas generation in many countries despite near-term economic outlook," Lambine said.

Analysts added that while growth was slowing in the region, relative low LNG prices and environmental concerns would prevent demand from falling sharply.

LNG price 2019 - Platts JKM

The S&P Global Platts JKM price is now about 33% lower at $5.95/MMBtu, compared with the price at the beginning of the year, with the market under pressure from oversupply.

"Asian buyers looking to take incremental supply can supplement their long-term contracts with spot LNG purchases that have become much more affordable. We see this reviving demand for generators that have previously idled power capacity or economic sectors which have reduced output because of the high costs," Waddell said.

OTHER STUMBLING BLOCKS

Some analysts are also expecting that once IMO 2020 rules on cleaner shipping fuels are implemented from January 1, the availability of relatively cheaper fuel oil would rise, making it attractive for the power sector in some south Asian countries.

Platts Analytics estimate that overall LNG to fuel oil switching potential was around 45 mcm/d, and could happen in places such as Pakistan, Bangladesh and parts of the ASEAN region.

Pakistan's switch from oil to gas for power after starting LNG imports

Among other issues, the US-China trade tensions still remained a near-term risk for energy demand.

"In the event of an all-out trade war, our economists expect that in 2020 China's real GDP growth would fall to 5%, US GDP growth would ease to 1% and global growth to weaken by 0.5-0.75 percentage points," DBS Group Research said in a recent note on LNG and natural gas.

After years of technological improvements, renewable fuel sources are now progressively able to compete with fossil fuels on an equal footing and are projected to be consistently more affordable by 2020, according to the International Renewable Energy Agency.

"While natural gas is complementary to renewable fuel, which tends to be inherently unreliable and an intermittent source of energy without further advancements in battery technology, sustained advances in renewable energy will steadily diminish the significance of natural gas in power generation," DBS said.

Commodities 2020 | S&P Global Platts

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Edited by Debiprasad Nayak, debiprasad.nayak@spglobal.com