Countries in Asia are assessing the risks of surging fuel prices and supply chain disruptions due to the imminent Russia-Ukraine conflict, as oil and gas ministries evaluate contingency plans with national oil companies and other energy firms.
Given ongoing developments, South Korea’s energy ministry, in particular, is concerned about price hikes of crude oil and LNG, an energy ministry official said. However, the ministry has so far ruled out any major impact on supply chains because of the structure of its purchases which are based on long-term contracts.
In a meeting convened by the Ministry of Trade, Industry and Energy with the country’s energy importers and energy intensive manufacturers on January 26, 2022, discussions centered mainly on supply conditions. Others in attendance included the state-run gas company and the country’s main oil and gas developer, chip makers, offshore plant builders and major think tanks.
Despite being the world’s first fifth-biggest crude oil buyer and the world’s third-biggest LNG buyer, it’s prone to price hikes because it imports all of its crude oil and LNG requirements.
“The participants expressed concerns about price hikes of crude oil and LNG, with the forecast of possible supply disruptions due to the Ukraine crisis. Energy prices are expected to get stronger even without armed conflicts there”, the ministry official said.
“The government will operate an early warning system on the supply of key industry materials and energy resources, while closely monitoring the situation,” Vice Industry Minister Park Jin-kyu said during the emergency meeting. “We will be fully prepared while bearing the worst-case scenario in mind.”
In Australia, government officials indicated there has been no formal request from the US to ramp up LNG supply for Europe, but said Australia stands ready to support its allies and that banks should continue to invest in the gas sector.
Impact of Ukraine Crisis in South Asia
Indian LNG importers ruled out any immediate fallout on gas supplies as the Ukraine transit point is meant for Russian gas supplies to Europe, oil ministry officials said January 27, allaying fears of any short-term supply crunch if tensions escalate.
“There won’t be any gas supply constraint as Russia is our most dependent friend,” a senior ministry official said.
Likewise, a possible war-like crisis between Russia and Ukraine would not make supplies to India costlier as the global price depends on supply and demand factors, and US LNG producers have been producing while the winter season in Europe is set to subside.
“We expect the global price to ease after March by when the winter season in Europe would be over,” an official at Petronet LNG, India’s largest state-run LNG importer, said.
Indian LNG buyers in the private sector echoed the sentiment of state-owned LNG importers like Petronet, with an executive at H-Energy noting that Russia or Gasprom are not expected to cut off gas supplies.
As cited by S&P Global Platts, the executive noted that cutting Russian supplies would starve Europe of gas and the punishment would be harder on Europe than on Russia. “It’s still a wait and watch the game,” the executive said.
H-Energy is developing over 1,000 km natural gas pipelines to connect its LNG regas terminals on the west and east coasts to downstream gas markets.
Goldman Sachs Proposes Unlikely scenario
According to Goldman Sachs, in a base-case scenario, supply disruptions are unlikely to occur, however, “the price risk to exposed commodity markets is nonetheless skewed to the upside relative to 2014 given tighter inventory levels.”
It further said a physical supply disruption raises upside risks for European gas prices of Eur12/MWh given the still critically tight inventory situation.
“More broadly, commodity markets are increasingly vulnerable to disruptions, after a couple years of historically low outages following the initial COVID shock,” the bank said, adding that the backdrop of the tightest inventory levels in decades, low spare capacity and a less elastic shale sector “points to the skew of large energy price moves shifting to the upside.”
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