LNG unlikely to ease high power cost in Philippines

MANILA, Philippines — Liquefied natural gas (LNG), which is being pitched as a reliable and affordable bridge fuel to transition from coal, is not expected to help ease the high power costs in the Philippines, with  supply constraints and high prices seen continuing in the next few years, according to US-based Institute for Energy Economics and Financial Analysis (IEEFA).

In a  report, IEEFA said global LNG supply constraints and record high prices in the wake of the Russian invasion of Ukraine are unlikely to be resolved by early 2023.

While some may argue that LNG prices will soon settle to affordable levels, IEEFA said prices are widely expected to remain elevated for the next four to five years.

LNG industry players, in fact, are anticipating that the ongoing supply crunch may not ease until 2026, it said.

“With only modest new LNG supply capacity coming online until about 2026, the bidding war for available LNG volumes may continue to buoy prices,”  IEEFA energy finance analyst and author of the report Sam Reynolds said.

IEEFA said LNG executives in the Philippines have argued that while one-off spot market purchases of LNG may be expensive, long-term contracts offer cheaper prices.

“But according to several sources, the Philippines has not yet signed any long-term contracts for LNG supplies. And given tightness in the global market, contracts with existing LNG supply facilities are challenging to come by,” Reynolds said.

“Portfolio sellers currently have little incentive to sign term contracts given sky-high prices and potential profits in spot markets,” he said.

Unless companies in the Philippines have already secured access to low-cost LNG, IEEFA said they may be forced to shell out exorbitant sums, on the order of $145 million per shipment, for LNG supplies.

“This means that even if terminals are brought online next year, the Philippines may grapple with supply uncertainty and high prices for years to come,”  Reynolds said.

IEEFA said two advanced LNG projects in the country have recently delayed commercial operations to next year, partly because of the challenging dynamics in international LNG markets.

These terminal projects of the Lopez-led First Gen Corp. and Singapore-headquartered Atlantic Gulf & Pacific (AG&P) are now targeted to begin operations in the first quarter of 2023.

IEEFA, however, said these new timelines are “overly optimistic.”

“LNG expansion in the Philippines should be viewed with intense skepticism and caution. Although pitched as a reliable, affordable bridge fuel to transition from coal, LNG is inherently volatile and expensive,” Reynolds said.

“This is true especially when compared to the declining costs of domestically-sourced renewable energy technologies, which do not require recurring fuel payments,” he said.

The report pointed out the Philippines is turning to LNG imports to compensate for declining production from the Malampaya gas field, the country’s only source of indigenous gas.

With Malampaya expected to run dry by the mid-2020s, there is an increased urgency to develop  LNG infrastructure, it said.

IEEFA said estimates range from two to five million tons of LNG per year to continue running the Philippines’ five existing gas-fired power plants.

However, IEEFA said the total capacity of proposed LNG projects far exceeds what is needed, with projects with a combined capacity of 36.5 million tons per year are at various stages of development, along with 29.9 gigawatts of additional gas-fired power projects.

“With such a large pipeline of proposed LNG projects, the Philippines risks becoming significantly exposed to the extreme volatility of global LNG markets. IEEFA has previously flagged the risk that unaffordable prices could cause LNG facilities in emerging markets to go underutilized,” Reynolds said.

IEFFA cited the Philippines’ high dependence on imported coal as one of the key reasons as to why its power prices are among the highest in the region.

It said coal prices are now around $430 per ton, 100 percent higher than the same time last year.

The cost of LNG, however, are even higher, as it is roughly three times the current price of coal a per-unit of energy basis, according to IEEFA.

“This means that a transition from one volatile, expensive import fuel (coal) to another (LNG) is unlikely to reduce power bills for Filipino end-users. Due to the structure of power supply contracts in the Philippines.