Asia gas power feels oil shocks with delay

Take-or-pay LNG deals limit operators’ ability to adjust output.

Gas-fired power operators in Asia face delayed but unavoidable cost increases due to oil price shocks, squeezing margins and limiting their ability to adjust output.

“That will directly impact fuel costs—either for spot purchases immediately, or for long-term contracts with a delay of four to five months,” Dieter Billen, a partner at Roland Berger GmbH, told Asian Power. He noted that fuel accounts for as much as 90% of the marginal generation costs of gas-based power plants.

He added that liquefied natural gas (LNG) pricing remains tied to crude benchmarks such as the Japan Crude Cocktail and Brent, embedding oil volatility into long-term gas supply agreements.

Operational flexibility narrows under stress. Take-or-pay LNG agreements require buyers to pay for contracted volumes even when unused, limiting response to sudden price shifts, Matthew Osborne, a partner at K&L Gates LLP, said via Zoom.

He added that power purchase agreements restrict dispatch decisions, leaving operators unable to freely adjust output even as fuel economy changes, whilst merchant plants retain only limited flexibility.

In most Asian markets, regulation, infrastructure, and environmental constraints shape generation decisions more than short-term price signals, Choon Hong Chua, a senior director at Moody’s Corp., said in an emailed reply to questions.

He said oil-linked pricing continues to transmit risk through legacy contracts, though exposure varies by market structure and import dependence.

Japan and South Korea remain heavily exposed under oil-linked contracts, whilst Southeast Asia shows mixed exposure. China is partly insulated by domestic supply, whilst Singapore faces high exposure due to near-total reliance on imported gas.

Rising fuel costs make gas-fired plants less competitive.

“After the lag of a few months, both oil and gas become more expensive,” Billen said. “Many Asian utilities have responded by maximising other fuels like coal.”

Gas-fired plants may shift into lower use or peaking roles as cheaper baseload sources take priority.

Price shocks also strain LNG contracts. Disruptions linked to the Strait of Hormuz can trigger disputes and, in some cases, force majeure claims, where parties seek to suspend obligations due to uncontrollable events.

Legal experts said price volatility alone does not qualify. Governments have introduced short-term measures such as tax relief and price controls to ease pressure on consumers.

Some may revisit domestic exploration policies to reduce import dependence, though that carries risks of resource nationalism and treaty conflict, Rodolphe Ruffié-Farrugia, a partner at K&L Gates, told Asian Power.

“Whenever there is a crisis around resources or energy, it may be tempting for governments to adopt a resource nationalism approach,” he said in the same Zoom call with Osborne.

“That is a very dangerous path to tread… Whether it’s fair or not, there are treaties between my country and yours that say you’re not supposed to do that,” he added.

The International Energy Agency released 400 million barrels from emergency reserves to stabilise oil markets in the short term, but structural exposure tied to LNG contracts remains.

Operators are turning to hedging and supply diversification, including long-term contracting and fuel portfolio balancing, to manage volatility.

Exposure remains structural rather than cyclical, as contracts dictate how and when price shocks flow through the system.