09/11/2022, 05:25 EU Energy Crisis Sparked by Ukraine War to Create Blackouts in Poor Countries - Bloomberg

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The Big Take

Europe’s Energy Crunch Will Trigger

Years of Shortages and Blackouts
To replace Russian gas, Europe is buying up fuel that used to go
to developing countries.

Workers unload liquefied natural gas in Karachi, Pakistan. Photographer: Asim Hafeez/Bloomberg

By Stephen Stapczynski, Anna Shiryaevskaya, and Faseeh Mangi

8 November 2022 at 05:30 GMT+5:30 Updated on 8 November 2022 at 08:05 GMT+5:30

Bills will be high, but Europe will survive the winter: It’s bought enough oil and gas to get through
the heating seasons.

Much deeper costs will be borne by the world’s poorest countries, which have been shut out of the
natural gas market by Europe’s suddenly ravenous demand. It’s left emerging market countries
unable to meet today’s needs or tomorrow’s, and the most likely consequences — factory

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shutdowns, more frequent and longer-lasting power shortages, the foment of social unrest — could
stretch into the next decade. 

“Energy security concerns in Europe are driving energy poverty in the emerging world,” said Saul
Kavonic, an energy analyst at Credit Suisse Group AG. “Europe is sucking gas away from other
countries whatever the cost.”

For countries like Pakistan, the strong dollar and increased competition from Europe are making it almost impossible to
secure energy.  Photographer: Asim Hafeez/Bloomberg

After a summer of rolling blackouts and political turmoil, cooler weather and heavy rains have
alleviated the immediate energy crisis in Pakistan, India, Bangladesh and the Philippines. But
any relief promises to be temporary. Colder temperatures are on the way — parts of South Asia can
be more bitter than London — and the chances of securing long-term supplies are slim. The strong
US dollar has only complicated the situation, forcing nations to choose between buying fuel or
making debt payments. Under the circumstances, global fuel suppliers are increasingly wary of
selling to countries that could be heading for default.

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The center of the issue is Europe’s response to tightening fuel supplies and the war in Ukraine. Cut
off from Russian gas, European countries have turned to the spot market, where energy that isn’t
committed to buyers is made available for short-notice delivery. With prices soaring, some

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suppliers to South Asia have simply canceled long-scheduled deliveries in favor of better yields
elsewhere, traders say. 

“Suppliers don’t need to focus on securing their LNG to low affordability markets,” Raghav Mathur,
an analyst at Wood Mackenzie Ltd. said. The higher prices they can get on the spot market more
than make up for whatever penalties they might pay for shirking planned shipments. And that
dynamic is likely to hold for years, Mathur says. 

Damage caused by global warming, such as the devastating floods in Pakistan, is also wreaking
economic havoc on emerging nations, prompting leaders at UN climate talks in Egypt this month to
discuss how richer countries can help provide more support.

At the same time, Europe is speeding up construction of floating import terminals to bring in more
fuel in the future. Germany, Italy and Finland have secured the plants. The Netherlands started
importing LNG from new floating terminals in September. European demand for natural gas is
expected to surge by nearly 60% through 2026, according to BloombergNEF.

Fuel Shifts to Europe

Europe's demand for LNG is projected to boom, at the expense of shipments to emerging markets
Five-year demand forecast in 2021 (million tons) 2022

Europe India Bangladesh

150 35 15

100 30 10

50 25 5

0 20 0

2020 2025 2020 2025 2020 2025

Pakistan Thailand Mexico

20 15 2.0

1.5
15 10
1.0
10 5
0.5

5 0 0

2020 2025 2020 2025 2020 2025

Source: BloombergNEF

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Exporters in Qatar and the United States are now entertaining bids from European importers
looking to buy fuel to fill the new capacity. For the first time, emerging nations like Pakistan,
Bangladesh and Thailand are forced to compete on price with Germany and other economies
several times their size.

“We are borrowing other people’s energy supplies,” said Vitol Group Chief Executive Officer Russell
Hardy. “It’s not a great thing.” 

Usually when there’s a short-term shortage, nations can sign long-term supply contracts, paying a
fixed rate for the assurance of reliable deliveries for years. That hasn’t worked this time. Even bids
for deliveries starting years into the future are being rejected.

India failed in its latest attempt to lock in shipments starting in 2025. Bangladesh and Thailand
essentially abandoned efforts to get contracts that start before 2026, when massive new
export plants in Qatar and the US plan to start shipping fuel. Pakistan last month was unable to
close a six-year deal that would have started next year, after several attempts at short-
term purchases also failed.

“We’d thought the crisis would be over by the end of the year, but it isn’t,” said Kulit Sombatsiri,
permanent secretary of Thailand’s energy ministry, at a briefing on Monday. If LNG prices continue
to rise, he added, the government would have to consider measures such as closing down
convenience stores and other high-energy businesses.

LNG suppliers fear that these nations won’t be able to pay for promised deliveries. Fuel is priced in
US dollars, and a single shipment currently costs nearly $100 million. For comparison, LNG
shipments averaged $33 million during the 2010s. And costs are higher still in domestic currencies
because the dollar has been rapidly appreciating, adding to pressure on the countries' beleaguered
finances. 

No Sellers
LNG suppliers have stopped bidding to sell fuel to Pakistan
Bids made for LNG purchase tenders
50  bids
50

40

30

20

10

2017 2018 2019 2020 2021 2022

Source: Pakistan LNG; PakESDA

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Pakistan’s foreign exchange reserves dropped to the lowest level in three years last month, pushing
the nation’s credit rating by Moody’s Investors Service deeper  into junk. Reserves
for Bangladesh, India and the Philippines are at two-year  lows. In Thailand, where inflation is
already at a 14-year high and reserves at a five-year low, the central bank warned that the situation
will worsen if the baht doesn’t stabilize soon. 

Without Russian gas flowing into Europe, the global gas markets will stay tight. Spot prices will
remain high, and without the ability to secure long-term supplies, developing countries may look to
dirtier fuels or other partners. 

Momentum behind natural gas growth in developing economies has slowed, notably in South and
Southeast Asia, putting a dent in the credentials of gas as a transition fuel, the International Energy
Agency said in its World Energy Outlook 2022. Natural gas is the cleanest burning fossil fuel, and
emits less CO2 than coal when combusted.

The energy shortage has already brought the emerging world and Russia closer together. Russia’s
been more than happy to offer fuel to Pakistan, India and others who’ve been shut out of the spot
market.

Indian Prime Minister Narendra Modi and Russian President Vladimir Putin at a conference in
September.  Photographer: Alexandr Demyanchuk/AFP/Getty Images

“We have established contact with the Russian side. We are, of course, very much interested in
procurement of LNG,” Shafqat Ali Khan, Pakistan’s ambassador to Russia, told the state-run Tass
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news agency. “If the rich countries take away all the LNG, what is going to happen to us?”

While China’s LNG imports have dropped overall in part because of high spot prices, the nation has
increased purchases of Russian LNG at a deep discount. Deliveries from Russia to China are up
about 25% so far this year, according to ship-tracking data compiled by Bloomberg.

Poorer countries may also turn to cheaper fuels like coal and oil. Or they’ll look to develop their
own domestic resources. The International Chamber of Commerce-Bangladesh urged the
government to move faster with natural gas exploration both on-shore and off-shore to replace
expensive LNG. Critics of Pakistan’s government are asking why they haven’t tapped gas reserves in
parts of the country.

“The only saving grace will be if it doesn’t get too cold,” said Shaiq Jawed, managing director at JK
Group, a Pakistan-based supplier of textiles to global hotel chains. This summer, for the first time in
25 years, the company only received half of the gas it needed, he said. If it needs to, it can rely on
electricity and coal-generated power. “This is the last resort, but closing down is not an option.” 

For people worried about climate change and the environment, none of those are good options.
Coal and oil are much dirtier than gas. The process of extracting new fossil fuels is energy-intensive
and linked to increased pollution and earthquake activity. 

“If natural gas is going to be beyond our means, obviously you’re looking at reverting to coal to an
extent because you need the base level of electricity to be generated,” Nirmala Sitharaman, India’s
finance minister, said last month. “And that just cannot be done only through solar or wind energy.”

Renewables, like solar, could provide relief eventually. Until then, high prices will do some of the
work. Emerging Asia’s gas demand growth slowed “markedly” between January and July as sky-
high prices dragged down consumption, according to the IEA. Thailand, the region’s top gas user,
saw a 12% drop in demand over that period as high prices squeezed power sector use and falling
domestic production reduced supply. 

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An LNG pipeline in Karachi in June. The country’s inability to sign long-term supply contracts suggests this crisis will last
years.  Photographer: Asim Hafeez/Bloomberg

Governments will have to do the rest, rationing fuel and scheduling blackouts when there isn’t
enough energy to go around. 

It will take up to four years for the market to balance, said WoodMac’s Mathur. Until then, volatile
prices will be the norm and, he said, “LNG will belong first to the ‘developed,’ with the leftovers for
the ‘developing.’” 

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Countries in South America, like Brazil and Argentina, may be slightly more insulated, given
investments in hydropower. Even so, Brazil’s import bill more than doubled during the first
seven months of this year to $3.7 billion, the result of surging overseas prices and delays on a

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domestic pipeline project. If the rainy season is late this year, Brazil may need to buy time with still
more LNG imports. 

“We shouldn’t forget that the part of the LNG that we get, somebody else doesn’t get,” said Gunvor
Group Ltd.’s Chief Executive Officer Torbjorn Tornqvist. 

Meanwhile, the Philippines and Vietnam are rethinking plans to start importing LNG. The
Philippines continues to delay the start of their first import terminal, while the government in
Vietnam is considering cutting  capacity for planned gas-fired power plants. Those projects were
designed to meet surging domestic demand. Policymakers have yet to put forward an alternative. 

— With assistance by Ann Koh and Patpicha Tanakasempipat

(Adds details in 20th paragraph. A previous version of this story corrected Kulit Sombatsiri’s title.)

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