How High Gas and LNG Prices Are Constricting Asia

In this episode, we speak with Gerry Arances. Gerry is the founder and executive director at the Centre for Energy, Ecology and Development in the Philippines, also known as CEED.

We focus mainly on the skyrocketing prices of gas and Liquified natural gas, or LNG, and how that affects Asia, specifically the Philippines. We also look into how much investment has been made into gas infrastructure before the price hikes, if investing in one source of fossil fuel to transition to cleaner sources of energy was a good idea in the first place, if high prices are temporary or long-term, how Europe's new appetite for LNG is affecting Asian gas supplies and raising costs, the impacts of high gas prices on everyday people and alternative ways forward such as looking into distributed renewable energy in the context of the Philippines and other Asian countries.

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Transcript

Host: Before we start, I think it might be a good place to briefly introduce yourself to listeners about where you're working, what your background has been, and what you're currently working on.

Gerry Arances: I'm the founder and executive director of the Center for Energy, Ecology and Development (CEED). It's a quite young organization in the Philippines, which does work on policy, but also engages communities and networks for policy changes not just on energy, but other related topics, especially on the issue of environment, availability, climate, and larger development issues. In the last couple of years, we've really focused on energy, specifically the energy transition in the country. Before CEED, I've been in the energy and climate space for the last 15 years in several organizations pursuing, in general, energy transition. So I've been involved in the first expansion of coal in the Philippines when it was just starting. It took us several years to get the coal moratorium in place. Previous to that, I used to work with indigenous peoples on natural resource and minerals management as well as did some stints with the labor sector.

Host: So you've been all over the place.

Gerry Arances: Kind of, but in the last couple of years, I've been really focusing on climate, energy, and the environment.

Host: We're talking about gas today, just for our listener’s sake. How has the gas industry portrayed itself over the years, particularly in Asia? What's the history behind it becoming known as a transition fuel now or how it's portrayed as a transition fuel? What got Asia hooked in the first place? You mentioned coal earlier, how did we jump from coal to gas? Also, you're from the Philippines, so maybe you could talk in the context of the Philippines and maybe that's a general reflection of Asia as well. How did we get here?

Gerry Arances: I think it was probably in the last decade or 15 years or so when it was more of coal as the villain. It was portrayed as very dirty, with a lot of imprint in terms of carbon emissions, but also related to destruction and especially coal mining in several other places, including several islands in the Philippines. It's quite graphic. During that time, gas has been portrayed as the lesser evil, lesser in terms of emissions compared to coal. I remember in the early days of the work on coal and in most of our interventions on policy work, but also in public education, is that you compare gas versus coal. Most of the literature then portrays gas as having lesser emissions. So in terms of if you want to transition or you want to pick your poison, I'd rather pick the lesser emission if the infrastructure or renewable energy investment policies are not yet in place. Such was the case in the Philippines and also the majority of Southeast Asia. 

At the same time, there are economies in Asia, in particular in Southeast Asia, that have been far advanced in terms of developing their gas industry and tied up to exporting gas. I'm pertaining to the likes of Malaysia, where Petronas plays a very strategic role not just for gas, but also for oil because it goes hand in hand in terms of extraction. Then you have the likes of the Philippines developing its first gas well, which was around roughly 15 to 20 years ago, which is Malampaya [gas field]. If you look at the most advanced in terms of gas infrastructures, corporations have built their capabilities technical as well as business-wise and banks - I’m pertaining to Thailand, which has been dependent on gas for the last decade with around 60%, so the majority of their power supply has been sourced from gas. But overall, it's mainly that gas is portrayed by many, even the scientific community as a lesser evil in terms of dealing with climate. 

In terms of economics, it's also the same. Stranded assets are not associated with gas in the last five years or so when stranded assets in the energy sector, vis-à-vis climate, and other factors have been introduced in the mainstream. It's really not associated with gas. Even in terms of economics, most literature would say that this is a preferred fuel source. I can still remember in 2019 or 2018 when there was the first sort of roadshow in the Philippines to introduce LNG. The presentation of one senate inquiry on it - because of the dwindling supply of the main source of natural gas in the Philippines, which is Malampaya, is projected to stop supplying by around 2027. LNG then was projected around two pesos 55 cents per kilowatt hour, compared to coal, which was around more or less an average of four to five pesos per kilowatt hour. So even in terms of cost and electricity prices, it's presented as such. But there are key players that have already been there, even for Asia. In most cases domestically, most of the economies, even in the likes of Bangladesh, do develop their own industry. In most cases, it's a bit acceptable. Even in the diesel aspect, you don't see this or the black smoke pollution coming out of gas-fired power plants, right? So it's really caricatured as a “lesser evil” in terms of fossil fuel sources.

Host: If we pivot to today, we saw this huge drop in demand and just energy in general during COVID. But then, we also saw a huge uptick in demand once restrictions were lowered. Subsequently, we had the Russian invasion of Ukraine, which kind of tipped everything upside down and then energy prices went pretty crazy. I know just in Asia, in general, in October, recently gas prices were up by around 300% or something really ridiculous. What are your thoughts on the context the globe finds itself in and how is this affecting Asia right now in terms of just high energy prices and in particular high gas prices?

Gerry Arances: I think, in particular, because of the impacts of the supply crisis and supply issues now and the uptick in terms of the pipeline in Asia has its implication as well in terms of the energy crisis, of cost and high prices of energy sources. You have to compete with how Europe deals with it in terms of the prices and the global market. But at the same time, because of the demand and the pipeline in Asia, it also drives that further. It's so acute right now even in the context of the Philippines. That is why there have been big fights in terms of rates issues in the Philippines vis-à-vis gas and in particular the San Miguel petition, which has gone through the courts and is a heated national debate now where you would find the president intervening on an initial court decision. It has gone to that extent because everyone already knows the implication and the situation in terms of the market. This is really driving the issue of affordability as well as accessibility in a region where energy poverty and accessibility in the first place are major issues. 

It also surfaces the limitation of being dependent on fossil fuel, a finite resource, vis-à-vis the vulnerabilities of the economies in Asia. A lot of conversations in most countries in circles or in policymakers are around dependency on imports. The other side of that is that there's a lot of impetus to actually pursue domestic extraction. These are two sides of the coin. That is not the policy of the government to limit its dependency on foreign imports, but to push for more extraction and develop the local industry, particularly in terms of gas and other sources like coal. So there's that implication as well. 

In most cases, countries that are dependent on importation would look at exportation as a way of not just questioning the issue of high prices, tariffs, importation, and the prices of supply, but at the same time, if you look at Malaysia, which is a gas exporting country, there are data that says there's an implication in terms of subsidies. So the subsidy is also growing. It's not just about earning from revenues. It's not an easy road map or picture even for Malaysia. Most or some advocates or policy groups are now looking at it in terms of the implication of what is happening generally in Asia.

Host: If we look at investment in general, in terms of gas, how much investment has been made in Southeast Asia or Asia in general, on gas-related energy systems? I think you mentioned earlier the implications of being reliant on an important source of fuel. Is that such a good idea in retrospect, considering that prices have gone through the roof lately? I mean, has this been the right course of action, in your opinion, for countries and in terms of a policy decision?

Gerry Arances: I think that's one of the major conversations nowadays in corporations that are tied up, but also with policymakers. In our data, the overall trajectory of Asia is that it occupies around 60% of the global LNG build-out. The LNG issue is a really big one for Asia and if you zoom in on Southeast Asia, the overall pipeline is around 102 billion USD and it's growing. It was lesser, around 20 billion USD, months after we released our report. So it’s really growing fast in terms of the overall pipeline. But Southeast Asia is far bigger than and until quite recently, when we updated our data on this, compared to East Asia, which was around just 84 billion USD at that time. Southeast Asia is the biggest in terms of the pipeline. I think the issue now is on supply and how the supply problem is driving the course of the prices of supply, but also driving the tariffs on importing or import-dependent countries such as the Philippines and many others in Southeast Asia. I've never seen most of these investments. The debate around here, in particular the legal petition from one of the big corporations in the Philippines, is that they would be allowed to raise their tariff because of the unforeseen situation globally. In terms of stranding, in several cases, they can just pass it to electric consumers, if you have a tariff structure you can actually pass through the cost of fossil fuel volatility or increases. 

Host: You mentioned the petition in the courts. Is this to do with the tariffs being passed on to everyday people?

Gerry Arances: Yes, that they need to increase, and then that has to be passed through. So it's a big debate because at the end of the day what's happening, not just in the Philippines, but across Asia, in terms of inflation, the overall impacts of the global food crisis nowadays, the debt problems, especially in South Asia, it creates a lot of complications. At the end of the day you have a social volcano and this adds up to that. In terms of whether this is a good business decision to invest in, what's happening has surfaced the fact that dependency on fossil fuels has this problem. While it is very acute nowadays because of the implications of the Russia-Ukraine war, we've seen that gas has been consistently increasing in the last five years. It's not like it has been stagnating or it has been dipping - that is not the case. 

During one of the side events in COP, I alluded in my presentation that we know for a fact where this will lead us if indeed the findings of many experts, that the prices of LNG globally will taper down at around 2026 so this is just a moment. If you look at what happened as a whole, in the early stage, it was all rosy pictures. The issue of stranded assets wasn't really a thing yet but it eventually caught up not just because of policies against coal, vis-à-vis climate, but also because renewable energy is becoming more deployable and cheaper. 

At the same time, on the other end, fossil fuel is a finite resource. It's the basics of economics. That's the law of supply and demand. Eventually, gas will become a standard asset. For example, the AIIB just released its energy update and it's all gas. People might praise the AIIB for finally putting in words that they will not be funding coal, but I think it's more of an issue that the AIIB’s energy strategy update is about gas and its location. The fact that it was so silent on the energy crisis and the supply problems is very telling. The supply issue and its implication on tariffs and high prices of electricity clearly illustrates the problem with being dependent on this. Even though they will be able to resolve it eventually around 2026 with more supply, which is actually in violation of the IEA findings. It's a problematic proposition. It’s not a win-win solution and in some cases, particularly in the Philippines, I think the likes of San Miguel, who has invested a lot in new gas facilities, has made a bad business decision. They just don't want to accept it, but their plummeting stocks speak for itself and I don't know if they have a way out of it. They don't even have a supply to get a 1.2 gigawatt existing gas plant that they acquired fully in June 2022 to run it and eventually be able to supply. What is happening is basically creating these problems and it should be a wake-up call for the business sector that this is not a sustainable bet or a good business decision from their end. For policymakers, I think they really have to address that and there are a lot of necessary policy changes in terms of safeguarding energy supply, energy security, and more regarding the implications of tariffs on the consumer’s rights.

Host: You mentioned San Miguel and that they acquired this plant in June. Was that an LNG facility that they invested in?

Gerry Arances: That's an old gas plant that was owned originally by KEPCO, the Korean electric company, which is now divesting from their coal plants. They realize that it has liquidity issues as well. But San Miguel is also building another one, close to 1.8 gigawatts, which is in the pipeline. Everyone in the industry knows that it will have a supply problem because even their existing plant is not running. I think the issue right now is that most of those new LNG or gas plants that have been built are either not running fully or not running at all because of supply issues. I think those that have been exposed will have a really big problem because, in one of the recent forums here, the former head of the Committee on Energy in the Senate clearly illustrated the problem on supply, that it's so hard to get a supply contract which is a big problem. For companies that have already bet on it and are exposed, this is a really big problem. For others that are still planning or are not yet fully exposed, this is a really good wake-up call.

Host: I just want to touch on supply for a second. This, in particular has to do with Europe's new appetite for LNG, post Russian invasion of Ukraine, since Russia's now using piped gas as a kind of geopolitical weapon after sanctions were placed on it after it invaded Ukraine. Now, how much of Europe's new appetite for LNG has affected, say, supplies for the Philippines, for example?

Gerry Arances: I think there are numbers and research already on the biggest Asian importers, which is basically the East Asian economies, so that's China, South Korea, and Japan. If I'm not mistaken, it’s around a 30% reduction in supply. Almost every quarter it's changing and because of what's happening, it's really a big problem. But even the existing supply for the existing economies in Asia are having problems in terms of sourcing LNG. The US, which is the main source of the likes of Japan and South Korea, is diverting its supply mainly towards Europe especially this year. 

The Philippines has always gotten its supply of alternative fuels. We’ve had problems with Malampaya in the last couple of years, mainly coming from Qatar. But if you talk to the industry, they're really not bullish in terms of supply. The biggest company that is now involved in the gas industry in the Philippines is the Lopez Group, the first gen, which has an existing fleet that supplies around more or less 50% to 60% of the overall electricity in Luzon, the biggest island in the Philippines. They're now renegotiating their supply contract. What we heard was that they're having problems. They’re definitely not going into long contracts, mainly short contracts like two years. They would be having problems in terms of the implication of the tariffs because, at the end of the day, their contract could actually be scrutinized. The issue of supply is really affecting, in particular the Philippines, and notwithstanding the other countries like Bangladesh, where the lines of rotating brownouts and tariff increases are just so acute there. The Philippines is just moving into that period and is relatively fortunate because we're not too dependent on it. The other side of the problem is that we're too dependent on coal. The issue of mix and dependency is really being highlighted in an acute way, but definitely, in terms of supply, it is a major issue right now.

Host: In terms of high gas prices, considering that supply is really constrained right now, how do you see the situation playing out? As we've talked about, some companies in the Philippines, for example, and in fact in other Southeast Asian countries and countries like Bangladesh that’ve made big bets on infrastructure. San Miguel has, I think you said 1.8 gigawatts in the pipeline. Can you see these infrastructure projects going underutilized if high prices stay or will they be abandoned? Or do you think that they might just bite the bullet and end up paying high prices for supplies?

Gerry Arances: In particular for the Philippines, for example, San Miguel, I was just pertaining to one of its projects that’s in the pipeline. Basically, the most advanced project, in terms of development because there’s construction already, so that’s the 1.8 gigawatts. But the overall pipeline plan of San Miguel is actually around 15 gigawatts in total and that’s just in gas. That's why in our recently updated report, San Miguel is the biggest in terms of a company that has a pipeline with around 15 gigawatts in Southeast Asia. It eclipses its counterparts, such as Gulf [Oil] and PTT, which are the big companies that are involving gas in Thailand and Vietnam. 

What is happening because of the issue on supply, notwithstanding, of course, the resistance of communities and stakeholders, raising the issue even of costs and the tariff implication has basically withdrawn their application for the environmental permit, which is one of the key permits. They've withdrawn their petition to the regulatory body recently this year with three projects. The other projects have not moved. For the case of the Philippines, it is like a reflection of what's happening in Southeast Asia or even across the board. I think there will be a new report that's coming out by the Global Energy Monitor looking at the year after having the supply problem brought about by the Russia-Ukraine war, on what is actually happening with gas plants or with the gas pipeline. I would presume that most of the projects that were announced have been withdrawn, not moved, or been delayed, like this San Miguel plant, which is 1.8 gigawatts and was supposed to be in operation in August based on its actual plan. That's the feature right now in most of the new LNG facilities in Asia.

Host: Some analysts suggest that this is just a temporary blip in terms of high costs and supply issues. Now they're suggesting that once new supply comes online, and that maybe in five years or six years, Asia will soon become once again, as we pertain to earlier in the conversation, an area that's in high demand of or demanding a lot of gas. Does this make sense from an economic and energy standpoint? Do you think that there is an argument there to suggest that this is just a temporary blip? Or do you see that the situation right now is kind of leading to this entire demand destruction that's going on in gas right now in terms of high prices and supply?

Gerry Arances: For one, there are some analysts that are saying that it won't go back to where it was pre-Russia-Ukraine war. Also because there are indications that it has been increasing prior to the Russia-Ukraine war. There are many policy implications to that which we have seen in 2021. For example, when the AIIB came up with its policy, its road map to financing gas, it sent a market signal to the industry, for Europe in particular. When the Asian Development Bank came up with a lot of restrictions in terms of its gas financing, it sent that market signal. So even before the war, we're actually moving towards that restrictive world where public finance as a leverage becomes far more restricted. Private finance needs public finance to address the risks, as well as policies in respective countries to actually support the entry of private finance into gas. So we were actually in that context already before the Russia-Ukraine war. Therefore, the indication is not that it will be as rosy as before and in particular because of what happened. 

This is where the work engaging policymakers and highlighting the problem of dependency on fossil fuel, in particular, on gas as a transition fuel has to be surfaced and debated on, including the business sector. Do you think San Miguel, after what happened just this year and moving into the next couple of years where you have a tight supply of gas will not have implications in terms of how they make business decisions? It will definitely have that implication that betting on gas is not a long-term investment strategy or business strategy. If there's any positive side out of this crisis, it's that it jolts those that have betted on gas and have even promoted that gas is a transition fuel. In particular, in the early part of this year or last year, because it was the election period, you would have other personalities talking about how gas is a transition fuel. They would say we have to deal with gas, we need gas to stabilize the intermittency of variable renewable energy, solar, wind, etc., do you prioritize renewable energy… And then you compare it to what they are saying right now. So there really is that change. 

In particular for business, it would really have a significant impact on the mindset. For exporters, they will definitely create, because they earn from it. That's why it is important to highlight that in Asia, you have the fourth biggest exporter, which is Malaysia. Then you have Indonesia building export terminals. One of the biggest projects by Shell is actually in Indonesia for an export terminal connected to an upstream gas project. So these are blind spots for the industry to look into because definitely they will be promoting that. But overall, I think there is that sense. Therefore, advocates, policymakers, or those that are engaging policymakers need to surface this conversation.

Host: If we zoom in a bit on everyday people, how does this affect their lives, their businesses, the economics of the country, or their politics? We have already seen an upheaval in Sri Lanka due to high debts and high costs of fuel that basically contributed to this ongoing energy crisis in the country. What do all these high prices and supply constraints mean for everyday people? You can speak in a Filipino context or if we'd like to, we can also expand into other regions of Asia.

Gerry Arances: When we were campaigning or advocating for energy transition, it was so abstract back then. But once you are connected with tariffs or high prices of electricity, then it becomes a gut issue because it's scary. It's real for those who do not earn even a dollar a day or even to some extent four or five dollars a day. It becomes a major issue, like any increase. At the end of the month, because of what San Miguel did in terms of its supply, because it pulled out, it got a temporary restraining order from one of the higher courts, which is now being pursued to be lifted by the government. The implication is that around $4 will be added to the monthly bill of an ordinary family. In the context of the Philippines where high inflation is prevalent, prices of basic commodities are just really skyrocketing. 

One of the staple ingredients that we use for food preparation is called sibuyas in the Philippines. It's not garlic, but it's one of the staple ingredients in food preparation, which is now very hilarious in terms of price. It's like a 500% increase per kilo. One of the debates is whether you are able to live without it or not. It has become ridiculous. If you look at social media and the reaction of ordinary Filipinos, of course, we cannot live with that. We've been living with that ingredient since I was born. So it's that ridiculous. The implication of additional tariff increases will really have an additional and heavy burden on Filipinos for other countries that derive revenue from gas, like Malaysia. There's a lot of conversation in terms of the increase of subsidy because it has implications in terms of the coffers. Eventually, it has implications in terms of the basic services that you are able to provide to it. So it has layers of implications, but for a country such as the Philippines, it’s far more acute because it's a gut issue. Historically, I think because of these issues, especially on high prices not just of electricity, but basic goods, have always been an explosive issue for Filipinos. What happened in Sri Lanka or even in India and Bangladesh to some extent, really happened to the likes of the Philippines as well.

Host: Taking all of this into account from the supply, cost of living, high costs of gas, overreliance on imports, etc. if you were to offer any advice for a way forward for Asian countries, to in a sense shield themselves from similar shocks like what everybody is going through right now against in particular for energy, what would you suggest and what do you think an appropriate way forward would be?

Gerry Arances: The easy answer is renewable energy. It's easy, but it's hard. Especially in countries like the Philippines, where 60% of our electricity is derived from coal and close to 25% is from gas. I think in most cases in Southeast Asia, that’s also the situation where they’re mainly dependent on fossil fuel. Concretely for the Philippines, I would just refer to what one of the regulatory bodies is now promoting as a starting point in terms of concrete relief. There are many policies that will caution or limit the impacts of high fuel costs. There are many. One of them is to actually source your electricity from renewables. 

The first aggressive push right now from the Energy Regulatory Commission is to engage all electric cooperatives in the provinces, because the majority of the distribution in the Philippines is based on electric cooperatives, to implement and encourage business households on net metering. Today, they've been really going around the country. Back then, more or less around seven years ago, the most famous competition from the Department of Energy, for them to encourage businesses and households, is that you save around more or less 70% of the money that you pay for electricity if you set up your own net metering or solar rooftop system that is connected to net metering. That's how they present it. I think the savings are far higher now. 

Secondly, they created a new policy on what they call the distributed energy resources (DER) rules, which basically allows for local governments or local communities that are aggravated to set up at least one megawatt of a renewable energy facility. 30% of this is, the electric cooperative is obliged to buy, meaning they're using their police powers that electric cooperatives or distribution utilities need to buy at least 30% of the one megawatt. Then, the one megawatt is used by the local government. I think these two interventions just this year, the new rule on DER was just released like three months ago. I hope most of the regulatory bodies in different countries take this crisis and problem as an opportunity to advance renewable energy, to advance distributed renewable energy. 

Once you push for large-scale renewable energy, it takes time. You need at least a year or six months at the minimum to deploy it. But for distributed renewable energy I think this is the opportune moment to really promote that and scale up in terms of ambition, especially partnering with local governments, because at the end of the day, they're the ones that are really feeling the brunt at the local level. If you are able to provide solutions for them to caution, because where we're left with this infrastructure that the whole power sector is dependent on, and we have to deal with it. You can’t actually have a pathway or carve out toward a more distributed renewable energy system. I'm really glad that one of the regulatory bodies in the Philippines has finally realized that and is taking advantage of the crisis as an opportunity not just to caution the impacts, but to actually promote a more sustainable source of electricity.

Host: What do you think the implications of that distributed renewable energy system, say, for the Philippines have? What are the implications on energy poverty and in particular electrification of rural areas?

Gerry Arances: Actually, that’s also the other benefit. There's been a lot of investments in the power sector [through] public finance and then always in the likes of ADB, the World Bank, or bilateral agreements, it's tied up to poverty alleviation. It’s always tied up to addressing energy poverty in the Philippines or in the region. Asia is one of the highest in terms of energy poverty, much more the issue of accessibility. So it's not just about affordability, since the issue of affordability is relative to different countries. Renewable energy is now a major tool to actually address that. For decades, the model has always been a fossil fuel-based, centralized, grid-tied strategy in the power sector. It’s really failed to address 100% of full electrification and accessibility for like a whole five decades. It hasn't been resolved. 

I think that the strategy for distributed renewable energy, which one of the regulatory bodies in the Philippines is now really moving into and quite aggressively, is to promote that. But we also need to deal with and couple that with the issue of big infrastructures. I don't want to say that DRE will actually solve everything. It has to be a combination of different strategies. At the end of the day, you have to deal with [the question] how do we convince the likes of San Miguel, PTT, Gull, and companies in Vietnam or somewhere else, that placing your bet on renewable energy is actually a far more good business decision? It's already there. Most of these companies have or are starting their own renewable energy portfolios. I don't know if there is an energy company nowadays that doesn't have an investment or their own renewable energy portfolio. In the Philippines, all the energy companies that are involved in fossil fuel have their own renewable energy portfolio or program. One could be less ambitious than the other, but there are a lot of starting points there. I think the industry needs to also wake up and reflect on what's happening. 

I think all policymakers are discussing this already. Unfortunately, there are drawbacks from being import-dependent to developing your own domestic fossil fuel extraction. That is a very problematic proposition, but it’s very enticing because of revenues and their ties to domestic corporations. It’s one of the major challenges with what's happening as well in Southeast Asia and in particular the Philippines. There's a lot of impetus on that. Definitely, for renewable energy, I think most of the stories of communities that have gone off the grid or communities that are for the first time able to use electricity, need to be ramped up because this is the time where the basic issue on tariff and high prices will actually become a major debate on the ground. The advocacy and the business sense on renewable energy will actually become an opportune moment for the renewable energy industry as well.

Host: Before we go, would you be able to give listeners any social media following opportunities to follow your work or maybe CEED's work?

Gerry Arances: CEED has a website, www.ceedphilippines.com. We are also on Twitter,  Facebook, and LinkedIn so you can follow us. We've released a lot of reports this year. We come up with reports on financing and tracking fossil fuel development for the Philippines and for Southeast Asia. We also track a few multilaterals. For next year, there are definitely plenty of reports that will be coming out. Please visit our website, it's fairly accessible. Or please email us if you need any particular information.