Poorer countries buy cheap LNG in economic boost

Countries in Asia and Latin America are buying shipments of natural gas as prices fall, helping to replace more polluting fuels and easing cost pressures on the economy.

LNG prices have fallen below those of fuel oil, encouraging its use in power generation. From Thailand and Bangladesh to Colombia, emerging markets were the largest buyers in the spot market earlier this year for the second consecutive quarter, according to BloombergNEF.

Vietnam and the Philippines recently bought their first LNG cargoes.

This is a dramatic turnaround from last year, when many governments struggled to secure energy supplies. High prices forced poorer nations to turn to coal or diesel, which are more polluting, and helped drive inflation.

While they now have a chance to repair their economies, their gas purchases also provide producers with a safety net by partly offsetting weak demand from heavyweights in Europe and North Asia.

"The return of LNG prices to more normalized levels benefits emerging markets the most, as their affordability and energy availability were most affected by last year's LNG price spikes," said Saul Kavonic, Sydney-based energy analyst at Credit Suisse Group AG.

"Emerging markets, particularly in South and Southeast Asia, are the main drivers of LNG demand growth over the next 10 years."

Many developing countries have gas-to-power projects that can burn diesel or LNG, said Chris Strong, a partner at law firm Vinson & Elkins LLP in London, which specializes in energy transactions. That gives them flexibility to react quickly when spot gas prices fall below US$10 per million British thermal units, and comes just in time for the surge in electricity demand as the summer heat spreads across Asia.

PetroVietnam Gas JSC purchased its first shipment of LNG for delivery in June and July. Vietnam launched its power development plan this month, with a focus on wind and LNG through 2030. Meanwhile, Thailand's PC PTT has been buying cargoes for the summer.

While long-term LNG deals, which tend to be cheaper, remain a challenge for countries that do not have investment-grade status, interest is emerging from those that do. Buyers in India are in talks with suppliers from the United States, Qatar and the United Arab Emirates for 20-year deals that will protect them from extreme price volatility.

Still, producers will be wary of relying too heavily on this demand. Increased consumption may not be enough to overshadow potential long-term weakness in regions such as Europe. Many governments are pushing renewables in an effort to address climate change and are calling for a reduction in gas use. While less polluting than coal or oil, burning gas still emits carbon.

The increase in LNG purchases may also be short-term, as price-sensitive buyers take advantage of a currently weak market to help meet higher summer demand, said Lujia Cao, a BloombergNEF analyst in Beijing.

Emerging nations have also taken steps to increase their clean-energy capacity and boost local gas exploration, said Ogan Kose, managing director at consultancy Accenture Plc. That could keep LNG demand increases in check. The appeal of cheap coal also remains strong.

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