Global energy crisis may hit PH LNG plans

The Philippines wants to import its first shipment of liquefied natural gas (LNG) this year, as LNG infrastructure proposals surge.

However, the country is entering the global LNG market at a time of extreme uncertainty. Supply is constrained due partly to the Russian invasion of Ukraine, and prices continue to hit record highs. Inability to buy LNG at competitive rates could leave new terminals and LNG-fired power plants unused and stranded.

A history of setbacks. According to the Center for Energy, Ecology, and Development, the Philippines has 36.5 million tons per annum of LNG import terminal capacity under development, along with 29.9 gigawatts (GW) of gas-fired power projects. San Miguel Corp. alone accounts for 14.1 GW of that proposed capacity.

Although projects on the pipeline have grown dramatically since 2016, LNG projects have been repeatedly canceled since 2003. More recently, LNG companies have been very active due to the depletion of the Malampaya gas field, the country’s only source of domestic gas. Two terminals were anticipated online this year, one proposed by First Gen, and another by Singapore-based Atlantic Gulf & Pacific (AG&P). Both companies have raced to bring the country’s first terminal online. First Gen even held a groundbreaking ceremony for its project in 2019, though it announced yet another delay in June 2022.

AG&P, meanwhile, recently reiterated its commitment to bring an LNG import terminal online this year. However, it remains unclear how the company intends to procure LNG given limited supplies globally.

LNG procurement challenges. Following the Russian invasion of Ukraine, a bidding war between Europe and Asia for existing LNG supply has driven up global prices. In March 2022, the Asian spot price reached $84.76 per million British thermal unit (MMBtu)—more than 15 times the price in March 2021. Prices are widely expected to remain high until at least 2026, when significant new supply capacity comes online.

Some LNG importing countries have been protected by existing long-term purchase contracts, which require sellers to deliver LNG on a predetermined schedule and price formula. But according to the International Energy Agency’s recent gas market update, the Philippines does not have any long-term contract. This exposes the country to high prices and extreme volatility. Without access to affordable fuel, LNG-to-power proposals in the Philippines could be delayed, canceled, or stranded.

LNG-to-power cost issues. High imported fuel costs translate directly into higher power generation costs. Current LNG prices of roughly $35/MMBtu would result in a power price in the Philippines of nearly P12.33-15.70 per kilowatt-hour (22-28 US cents/kWh) for the fuel alone. This is already much higher than the country’s average price for power, even before adding capital costs to build the power plant.

In February 2021, however, San Miguel subsidiary Excellent Energy Resources Inc. (EERI) won a power supply contract with Meralco by promising to deliver electricity from its proposed LNG-fired power plant at a price of just P4.1462/kWh (7.4 US cents)—roughly one-third of the actual cost it would take to produce power based on fuel cost alone. Unless the company has already secured access to low-cost LNG, it seems unlikely that EERI would be able to meet its 2021 bid price.

Any renegotiation of the contract of regulatory appeal by EERI could see higher fuel costs passed on to end-users. Currently, San Miguel is seeking a temporary rate increase from the Energy Regulatory Commission for two of its other power plants in light of high imported fuel costs. San Miguel promised a specific price for its LNG-fired power project, knowing full well that LNG prices are extremely volatile. Going forward, if it cannot meet the price of its bid, the company—not Filipino citizens—should bear the cost of global fuel price increases.

Window of opportunity. Risks surrounding limited global LNG supply and exorbitant costs are expected to persist over the next decade. High imported fuel prices could result in higher power rates for Filipino households and businesses, potentially stunting economic development.

Domestic renewables, meanwhile, can deliver low-cost power at scale, as demonstrated by the recent success of the Green Energy Auction Program. Annual auctions could significantly reduce the country’s need for new LNG capacity. As the Philippines accelerates its transition to clean energy, LNG assets are likely to become more uncompetitive and unnecessary.

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Sam Reynolds is energy finance analyst at the Institute for Energy Economics and Financial Analysis.