The recent rally in LNG prices in Europe and Asia has dramatically widened the economic incentive to switch from natural gas to oil in power generation. Steep carbon regulations and operational constraints limit Europe’s ability to burn oil in power plants, but Asia has more flexibility. If the gap between LNG and oil prices remains wide, Asia is set to boost oil demand by 400,000 barrels per day on average over the next two quarters, a Rystad Energy report shows. This will support already high oil prices.

Asia’s liquid-burning capacity for power generation has declined over the past 10 years, but still sits at about 100 gigawatts (GW), mostly in Japan, Taiwan, Indonesia, Bangladesh and Pakistan. Asia’s current oil consumption for power generation fluctuates at around 900,000 bpd, which leaves a monthly unused and available oil-burning capacity of bit more than 550,000 bpd. As the continent is expected to add 400,000 bpd on average in the next six months, utilization of the oil-burning infrastructure will surge.

When we look at the potential uplift in demand of 550,000 bpd, Japan would account for the lion’s share with more than 300,000 bpd, followed by Indonesia (58,000 bpd), Taiwan and Bangladesh (39,000 bpd each) and Pakistan (33,000 bpd). This assumes a load factor of 0.7 for all the liquid capacity, and also takes into account that some older natural gas plants can switch to oil temporarily.

“This is a significant increase for Asia, when looking at its current oil-to-power use. From a global oil balance perspective too, this would be a significant shift, and it provides support to the current rally in oil prices,” says Claudio Galimberti, senior vice president on Rystad Energy’s oil markets team.

Source: Rystad Energy