Pakistan, along with other developing nations, has experienced a flurry of crises since the pandemic. A vicious combination of fiscal, social, and energy issues has left the country in a very precarious position. With summer approaching, and Pakistan’s energy demand set to surge, a cold spell in Europe might just be enough to push the country into yet another crisis.
European demand for LNG has spiked since Russia’s invasion of Ukraine and Europe’s resultant embargos on Russian natural gas. Global demand for LNG has increased (hitting 101 million tons in 2022 - 58 percent higher than in 2021) and Europe is working on scaling its capacity by 34 percent from 2021 levels. A warmer-than-expected winter in Europe has led to a lull in LNG prices, although they still remain at multi-year highs.
Weather Check
Never before has the weather in Europe been such a critical factor in global energy markets. Thanks to a mild winter, Europe was able to maintain its natural gas inventories and some were even proclaiming the end of Europe’s energy crisis. However, recent assessments show that such claims might have been premature.
The latest data shows that temperatures have started to fall again. According to a brilliant Twitter thread by Francesco Sassi, gas stocks fell to 78.35 percent from 81 percent a few weeks ago - gas storage now looks to have dropped below 70 percent, although that remains higher than in previous years at this time.
The Polar Vortex is also getting strong. As such we can expect temperatures to fall further in Europe and therefore the likelihoods of withdrawals from the inventories increase (as shown in the chart below by Heinrich Leopold).
The image shows that the “trend” is negative when it comes to gas storage.
A strong Polar Vortex is also affecting temperatures in East Asia as 160 people have died in Afghanistan and the temperature in Beijing has dropped to minus 16C. Japan received a record amount of snow. This is putting further upward pressure on LNG markets.
China factor
China remains another wild card as its reopening is set to boost demand and could leave Europe with a 27 bcm shortfall (if Russian supply drops to zero and China’s demand regains 2021 levels). Analysts expect a strong rebound in Chinese energy demand in 2023 will projections that its LNG imports could rise to between 70-72 million tonnes - an increase of 9 to 14 percent YoY which will subsequently be translated into higher prices. It will also pose a risk for Europe for the restocking of its inventories next winter.
Rising Prices - Impact Beyond Borders
Natural gas futures have already started to rise. The benchmark, TTF, recently registered a 6 percent weekly gain which was the biggest increase since December 2022.
Such global economic conditions bode ill for a country like Pakistan which is already dealing with an ailing economy and failing power infrastructure. A week ago, almost the entire country was plunged into darkness due to the failure of the national power grid. This was the second such incident in the past three months. Natural gas accounts for about 40 percent of the country’s total energy mix. It also imports about 80 percent of its oil needs.
Recently, ENI - an Italian company - declared force majeure, leaving Pakistan with no LNG cargo for the month of February and creating an expected shortfall of 325 MMcfd. This will increase the use of furnace oil (which is more costly) subsequently skyrocketing consumer bills. If the price of LNG increases further it will make it even more difficult for cash-strapped Pakistan to purchase it. For instance, the offer from Qatar Energy for a shipment price of 39.8 mmBtu back in July was the priciest in Pakistan’s history.
Pakistan has recently ramped up its efforts to get discounted Russian oil, but there are multiple diplomatic and technical challenges to the implementation of such a development. It will take billions of dollars of investment to tune the current refineries to process heavy-grade, sour crude oil from Russia, which means it is unlikely to be a short-term fix.
Asia’s imports of LNG have fallen as a whole. From 282 million tons in 2021 to 263 million tons in 2022.
As temperatures rise in Pakistan, the load on the power grid will increase considerably. It will put further pressure on the government as it tries to prepare for a $1.1 billion tranche from the IMF. The customers will face a double whammy of a rise in energy prices plus upward adjustment by the government, resulting in unprecedentedly expensive energy. The chance of further power outages will also increase and the menace of “load shedding” will become unbearable.
European energy policies have long had a significant knock-on effect on developing countries like Pakistan. Now, with global natural gas markets having been transformed by the halting of Russian gas flows to Europe, it seems European weather is just as important.
By Osama Rizvi for Oilprice.com