LNG prices in Asia are now around $50 per million British thermal units. Gas was about twice as expensive as diesel on an energy-equivalent basis, while fuel oil and high-sulfur coal were still cheaper, according to S&P Global Commodity Insights.
In Europe, the situation is similar, with natural gas at about $60, at least triple the price of HSFO and propane, according to FGE.
Natural gas has become the hottest commodity while Russia, a key source of pipeline gas to Europe and LNG to Asia, keeps supplies under pressure amid the global energy crisis. There is little to go around, and the situation is expected to worsen as winter approaches. At the same time, the surge in prices makes fuel unaffordable for some countries. As a result, both rich and poor buyers are increasingly looking for alternatives.
“Due to concerns that supplies could become very tight this coming winter, various governments have recently announced they will allow more fuel oil and coal burning in power plants,” said Steve Sawyer, director of refining at industrial consultancy FGE. “If the flexibility to burn fuels other than natural gas is already in place, then we suspect it is already being used,” he said.
The International Energy Agency raised it on Thursday forecast for global oil demand to rise by 380,000 barrels per day to 2.1 million barrels per day as industry and power generators are expected to switch their fuel to oil. According to the agency, the additional demand that prompted the review is “predominantly concentrated” in the Middle East and Europe.
The IEA’s view was echoed by Damien Courvalin, head of energy research at Goldman Sachs, who expects the gas-to-oil shift to add 1.5 million bpd to demand this winter, compared with 1 million bpd last year. Demand will come from both the energy sector and industry, he said in an interview with Bloomberg.
In Asia, Pakistan and Bangladesh are among the countries with significant capacity that can switch from natural gas to fuel oil for power generation.
Pakistan and Bangladesh “have significant oil-producing capacity and face severe budget constraints to continue buying expensive LNG,” Wood Mackenzie principal consultant Max van der Velden said. “They’re trying to keep the lights on and avoid serious economic stress by using fuel oil.”
The shift away from gas is a setback in the global drive for cleaner energy. Many countries have turned to natural gas as part of their decarbonization efforts, as it is the cleanest fossil fuel. The dirtier alternatives from coal to liquid fuels will make it harder for countries to meet their climate goals.
The EU Commission will continue to encourage more coal-fired power generation this year and next, temporarily reversing a long-term decline in Europe’s coal consumption, analysts at Fitch Solutions said in an Aug. 8 note. And higher LNG prices will encourage power generators around the world to switch from gas to coal where possible.
But there are limits to how much fuel transfer is possible. One problem is the lack of oil-fired power plants, because it can be difficult to bring oil-fired or coal-fired power plants back online.
“The restart of such plants will depend on how well they were shut down and then maintained,” FGE’s Sawyer said. “Don’t expect factories like this to pop up overnight.”
Most of Japan’s oil-based energy capacity is currently idle. According to Van der Velden, the plants are old and expensive to restart, they will be short-lived and face environmental and political backlash.
“Japan will continue to see annual growth in demand for fuel oil for the power sector, but its benefits are limited,” he said.
Still, it’s hard to ignore the cost of fuel switching, and FGE expects more countries to push to restart oil-fired power plants. “The process is going to have to start now if they want to be ready and running to meet winter demand,” Sawyer said. BM