Is Rising Demand for Liquid Natural Gas a Zero-Sum Game?
Year on year growth in demand for liquid natural gas (LNG) has mostly come from developing countries. Are the increasing imports of LNG a positive outcome or a road to increasing dependency on external sources?
Trends in LNG Exports
Two main trends associated with LNG exports and imports have emerged in the last few years. Growth in LNG imports has come from developing countries. Certain patterns have also emerged in countries contributing to the growth of the liquid natural gas industry.
From a geographic perspective, the main regions accounting for growth in LNG imports are Asian countries. Particularly, countries in Asia which are in South and Eastern Asia.
Another pattern in the imports of LNG has been the increasing exports from countries which are already world leaders in fossil fuel exports. Qatar, Australia and the United States are some of the leaders.
The Key Importance of Pricing
The price of liquid natural gas, compared to other fuels has played a role in the imports of this fuel type. The price of LNG exports from the US has steeply declined since 2014. With lower prices, how will the increasing imports to developing countries will affect their foreign relations and the economy?
The countries from which developing countries buy liquid natural gas, play an important role. The developing countries which saw most grow in LNG imports, imported the fuel mostly from developed countries.
Foreign relations also affect the buying process. Buying from neighboring countries or allies is, after all, different than buying from countries with whom relations aren’t as warm. While buying from allies has only given marginal benefits to countries like Bangladesh and Qatar, India’s purchase of LNG from the United States has facilitated their relations in other areas.
Economic Downsides of LNG
A cheaper energy source like LNG also has its downsides. Imports from external sources, while economical in the short term, could decrease energy independence of the importing countries in the long term. There are several examples in developing countries where LNG is a trade-off between independence and diversification. Turkey has diversified its energy sourcing by increasing LNG imports, and Chile is preparing to use LNG imports once again.
However, the overall trend has not been beneficial to energy source diversification and independence in developing nations. Particularly, in South American countries. Countries like Brazil have decreased LNG imports and its role as an energy source.
Liquid natural gas exports are divided between government-controlled companies and private ones. The political implications of importing gas from one or the other type of seller also differ. With the growing entanglement of public and private enterprises in the energy sector, it may seem as if state and non-state actors and their differences are being blurred. Yet, in developing countries, there are still large and expanding differences (politically-motivated decisions, prioritization of internal development rather than lower costs).
The Pros and Cons of Developing Countries’ Rising Dependence on LNG
From economic point of view, increasing LNG imports in developing countries could deliver both positive and negative long term impacts. The cheaper and sometimes cleaner energy source should reduce costs of production and the negative effects of pollutants.
On the macro level, in countries where LNG fuel is used by individuals, effect on their disposable income is bound to appear. In two developing countries with largest growth in LNG imports (China and India), the energy source could increase disposable incomes because of being relatively cheaper compared to other fuel sources, and decreases in price.
Governmental spending on energy generation and fuel sourcing is also bound to be affected. While LNG is a cheap source of energy, and a good tool for increasing the speed of economic growth (in the form of lowering expenditure of businesses on their energy and fuel needs), it could be damaging for long term economic development.
Time to Think Long-Term
Without investments into now more expensive — but cheaper in the long term renewable energy — developing countries face a perilous future. They could be left with only a more expensive source of energy, and the infrastructure for it. Moreover, spending becomes an even larger gamble because of LNG imports being subject to price volatility due to non-energy related factors.
There is some uncertainty to this hypothesis. Because renewable energy infrastructure costs are decreasing year by year, choosing to not invest into it in the present could be an economical decision. Yet, spending billions on energy infrastructure which will get relatively more expensive in the future, is also not the most rational decision.
Such dilemmas are not faced by exporters. For LNG exporting countries, several benefits come from the exports of this fuel type. Because of the early set prices of liquid natural gas exports and their mild fluctuation, there is less volatility and room for manipulation. Hence, liquid natural gas exporting countries can use this benefit for convincing potential importers, and making easier sales.
Stronger ties with importing countries are a given. In many countries, LNG trade relationships have brought on a larger concern for political developments in the parties on the other side of the trade. However, energy ties are far less impactful and strong when countries with already strained relations, or private enterprises engage in the trade. LNG exports haven’t given a strong push for better relations of China and the US.
Boosting Domestic Production of LNG
The development of domestic gas industry so far has been the most noticeable benefit for the exporting nations. It not only allows to better serve exports, but also to have a fallback for increasing domestic demand.
In contrast to exporting countries, for countries importing the fuel, it expands dependence on external sources. LNG contracts can be difficult to renegotiate, and in times of price drops, not all buyers have been able to take advantage of them.
A drawback for imports of LNG into developing countries is the infrastructure requirement and difficulties that come with it for developing countries. Pakistan has experienced a slow pace of building of LNG infrastructure, even with 4th place in growth in imports in 2018. For other liquid natural gas importing countries in the developing world, the mission to build more objects is often impossible without loans.
This drawback of importing LNG is often compounded by a lack of qualified workforce and a skills shortage for solving problems with the gas infrastructure objects. Outside help is often a necessity both for normal operations, and for accident management.
The increasing development of the domestic industry is a benefit all exporting nations can reap. Exports of other fuels also promote better relations between countries. Yet, not all benefits come without a cost to the other side. LNG exports have one benefit for the exporters, which is also a drawback to the importers. Importing nations not only buy the LNG from certain nations, but also the expertise and loans to import the fuel. In cases like these, many developed nations with sales of LNG, also guarantee sales of related products.
The push to make a choice between fossil fuels, including liquid natural gas, and renewable energy will increase in the future. If the premise of decreasing costs of renewable energy will follow, then the current use of LNG is the most beneficial choice for developing countries.
Factors working against savings on energy in developing countries have been high infrastructure costs, need for external financing, and not always placing value on the cheaper energy options. There are several reasons why they are bound to deliver to deliver a low impact. These include improving financial states of developing countries and decreasing shipping and infrastructure costs. Yet, even with low impact of the current issues, they are a damaging effect to both present and future savings.
With LNG, savings also extend to pollution. Liquid natural gas is a good alternative to oil and coal, which are often used as energy sources in developing countries. In the present, alternative energy sources for largest importers of LNG don’t necessarily have to be a priority, especially when energy flow disruptions are unlikely.
With ongoing processes having a positive effect on energy diversification in developing countries, larger LNG imports are more of a strong push for growth, rather than dependency.