Mon, Apr 22 2024 22 April, 2024

Philippines’ LNG drive runs into market dynamics

The Philippines is trying to revamp its power sector by building more gas to power projects along with several LNG import terminals, however there’s growing concern that LNG might not be the best option going forward.

Aerial drone photo of crude oil and LPG tankers (Photo credit: Adobe Stock/aerial drone)

In mid-June Manila-based First Gen Corp. asked the state energy ministry to extend its permit to construct an offshore LNG terminal in the Philippines by six months due to circumstances delaying the project. If completed, it could become the country’s first LNG import terminal.

The request to extend the permit to March 23 next year, from September 23 this year, was due to expectations of a delay in completing the project caused by events and circumstances beyond its control, the company said in a statement. It did not specify the issues the project faced.

It’s one of three First Gen-supported LNG projects in the country, all in Batangas City, around 100 km south of Manila.

The Philippines has at least six LNG projects approved by the federal government amid its plan for more FDI for LNG infrastructure to offset coal usage needed for power production and to serve existing and planned gas-to-power projects. The LNG projects, at a cost of around $1.61 billion, would supply some 8.6 GW of power.

However, energy market dynamics have changed over the past few years since the country sanctioned its six proposed terminals, including record high LNG spot prices, global gas supply tightness, and the move away from gas and LNG to more renewables to help countries meet their climate goals.

The Philippines largely consumes coal, with the fuel having the highest contribution to the power generation mix at 58% in 2021, according to Philippine energy ministry data.

High stakes

The stakes are high for the Philippines since its Shell run deep-water Malampaya gas field is projected to run dry before the end of the decade. The field delivers around 20% of the country’s electricity requirements, and around 30% for Luzon, the country’s largest and most populous island which includes Manila, the Philippine capital.

The Philippines has been trying for over a decade to build its first operational LNG import facility, but those plans have so far been set back.

While interested foreign companies obtain approval from the federal government in Manila, they usually run into considerable red tape and bureaucracy at various provincial levels, forcing most to pull up stakes for other neighbouring countries.

Fuel of last resort

However, even if some of the terminals are built, an Institute for Energy Economics and Financial Analysis (IEEFA) report finds that LNG in the Philippines is a fuel of last resort due to high gas prices, an unreliable LNG spot market for lower prices, and environmental concerns.

The LNG price argument has been strengthened since September when IEEFA’s report was written. Since that time, global gas prices have spiked both in Europe and in Asia.

First, a global gas supply crunch has continued due to under-investment in gas and LNG infrastructure over the past several years in favour of renewables.

Moreover, since Russia’s invasion of Ukraine in February and Russian state-run gas giant Gazprom’s continued disruption of pipeline gas supply to Europe, prices have continued to face upward pressure.

In the Asia-Pacific region, home to around two-thirds of global LNG demand, spot prices for the fuel delivered into North Asia breached the $80/MMBtu price point earlier this year. Since then, they have pared gains, but are still hovering just beneath $40/MMBtu.

Any new LNG projects in the Philippines will be entering a market for the fuel facing these pricing and supply headwinds. Without being able to sign sales and purchase agreements (SPA) for long term LNG supply, they would face the uncertainty and high prices found in spot market procurement.

Asti Asra, principal analyst of APAC Gas & LNG Research at Wood Mackenzie, told Gas Outlook that it’s hard to see demand for Philippine LNG projects beyond commissioning.

She said it will be challenging for the Philippines to completely switch to LNG in the short-term, given market tightness and high LNG spot prices. A likely scenario could unfold, she said, with projects blending gas supply from the Malampaya field with spot market supply, thereby helping to offset higher spot prices for the fuel.

This could help projects remain competitive over the next four or five years, she added, while more supply comes on the market around 2026/2027, primarily from Qatar’s LNG expansion and US LNG projects.

The IEEFA argument of whether or not LNG is good for the environment is open to debate, however, the fuel omits 50%-60% less carbon emissions than coal when used for power production, while also helping the Asia-Pacific region pivot away from traditional coal reliance.

Coal remains a cornerstone of electricity generation in China, India and other Asian nations, which together account for around 75% of global coal demand, a recent World Economic Forum report said.

Some also dismiss LNG as a bridge fuel, urging all energy investment in renewables now, instead of in gas and LNG infrastructure. Yet, the intermittency of renewables, proper wind speeds to drive turbines and sun radiancy levels for solar projects, is still problematic and has yet to be solved.

Philippine power project hurdles

Asra added that the challenge for the Philippines is that around 3 GW worth of gas-fired power generation runs on Malampaya gas, and if LNG isn’t imported these projects will become stranded assets.

This would in turn push up power prices in the country, already some of the highest in the region, while funding new coal-fired projects as replacement would be difficult to finance.

This is in line with a recent push to phase out funding of coal infrastructure, including by the World Bank, and the Asian Development Bank (ADB).

The World Bank, for its part, stopped directly financing utility-scale coal-fired power plants in 2010 and halted funding for upstream oil and gas operations more recently.

Manila-based ADB was slower to implement its coal and fossil fuel phase-out. However, in May it said in a draft plan that it would end all financing for coal mining and power plants, and ban support for all oil and gas production.

Financing LNG terminals in the Philippines has also been a problem, according to Perth-based Energy Consultants founder John Morris, which has done considerable work in the Philippine electric and energy sector.

He told Gas Outlook that the main obstacle to LNG in the Philippines was always that they couldn’t be financed, while “nobody will supply the LNG unless the whole thing is underpinned by a creditworthy power offtake.”

“There are only two entities that are in that category: Meralco [Luzon’s largest electricity distributor] and the federal government,” he says.

He argues that the government couldn’t finance projects unless they rip up EPIRA (laws set up 25 years ago to privatize the power sector), which would effectively “open a whole new can of worms.”

Asra agrees that energy infrastructure in the Philippines being privately owned is a problem.

“If the Philippines were more like Vietnam, for instance, the government could push the projects through,” she says.

However, she sees at least two of the six approved LNG projects being built and becoming operational:  The Atlantic, Gulf & Pacific (AG&P)–San Miguel Corp. LNG terminal in Batangas City, which signed a power purchase agreement (PPA) with Meralco, starting in 2024, and First Gen’s terminal, that is currently negotiating a PPA with Meralco.