When restaurants in Japan open their windows to help combat the spread of Covid-19, you might not think it would have much effect 6,000 miles away in lockdown Britain.
But the shivering diners of Tokyo and Kyoto, where restaurants are still allowed to admit customers for limited hours, are not just an illustration of the differing emphases put by governments on the dangers of the aerosol spread of the virus.
They also tell a story of interconnected energy markets and increasingly how what happens in Asia can have a large knock-on effect for the UK and Europe — from what consumers pay to heat their homes to the ability of national grid systems to comfortably keep the lights on.
As a brutal cold snap has hit Japan and much of north-east Asia in recent weeks, Japanese utilities have had to scramble to source fuel supplies.
Power prices in Japan have soared to record highs and the government has asked citizens to limit energy consumption by turning off lights and appliances, even while urging them to keep the heating on and the windows open.
But the biggest pinch point for Japan has been the country’s reliance on liquefied natural gas, a once relatively niche commodity that has grown in global importance over the past decade.
Japan has long been one of the biggest importers of LNG, which is natural gas that has been super-chilled and compressed so it can be delivered by ship. The country lacks pipeline access to gas or its own reserves of a fuel that it needs for heating, electricity generation and manufacturing.
But as the LNG market has grown, Japan has had to increasingly compete with other countries looking to substitute highly polluting coal. Energy consultancy Wood Mackenzie estimates LNG has risen from 11 per cent of global gas supplies in 2010 to 15 per cent today (and it forecasts it will reach more than 20 per cent by 2040).
Prices for LNG cargoes in the Asian spot market have soared to record levels this week as the cold snap hit, up almost 20 fold from just a few months ago when the market was seen as oversupplied.
Energy traders have diverted every LNG cargo they can towards the Asian market, with China and South Korea also scrambling to buy. But they have been hamstrung by a number of problems, from a lack of available tankers and delays at the Panama Canal, to outages at various projects.
Goldman Sachs described the situation this week as a gas market that had “shifted from a bearish perfect storm last year to a bullish perfect storm now”.
Some have gone further. Bruce Robertson at the Institute for Energy Economics and Financial Analysis said that the world “may be coming to the end of an era of stable gas prices”.
Energy companies like Royal Dutch Shell and Chevron have bet tens of billions of dollars on LNG investments. Alongside countries like Qatar, Australia, the US and Russia, they will be the immediate beneficiaries, even if the rally is expected to wane once the weather warms up.
But the LNG price spike has raised a number of questions, not least for buyers in Asia and other regions, including Europe and the UK.
While most LNG cargoes still trade on long-term contracts, offering some certainty around supply, that also means the spot market is smaller and less flexible than other commodities in responding to short-term spikes in demand.
In the UK, more than 20 per cent of gas consumed in 2019 was imported as LNG, with traders snapping up cheaply priced cargoes at a time of oversupply.
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But when demand for LNG rises in Asia that supply can quickly dry up. Like most European countries, the UK is in a position to boost gas imports from pipelines. However, the LNG spike nevertheless reveals a vulnerability that is not too dissimilar to that faced in Japan and South Korea this week.
This week UK gas prices jumped to the highest in more than two years as LNG prices surged. Power prices have also spiked, with the UK burning more coal to meet electricity demand. The UK is forecast to become more reliant on gas imports in the coming years as North Sea output declines.
Frank Harris at Wood Mackenzie says the LNG price spike would have long-term ramifications for the industry, from boosting the appetite to invest in future projects to making utilities think long and hard about how to source cargoes long-term.
“Buyers are going to become aware that you may not always be physically able to source a cargo in the spot market regardless of price,” Mr Harris says. “The most likely outcome is it shatters some of the complacency that’s crept into the market over the last 12-18 months.”
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