Energy security a question of time

On Oct. 5, Saudi Aramco chief executive officer Amin Nasser warned that the world’s oil stocks were “scarily thin.”

For most countries, that means higher prices. For Taiwan, which imports almost all of its fuel, it raises a more basic question: How long can it keep its power on if supplies are cut?

Taiwan holds more than 140 days of crude oil, but its natural gas, which generated 47.8 percent of its electricity last year, would last about 11 days. Japan, by comparison, holds roughly two months of gas.

After the US-Israeli strikes on Iran on Feb. 28, shipping through the Strait of Hormuz collapsed and Qatar, Taiwan’s second-largest gas supplier, stopped production. In April and May, no gas cargoes reached Taiwan from Qatar or the United Arab Emirates. Refiners rerouted oil through Saudi Arabia’s Red Sea ports and bought more from the US.

To keep the power on, Taiwan bought gas on the spot market, where single cargoes are sold to the highest bidder. Spot purchases rose from about 30 percent of supply to between 60 and 65 percent, and the price Taiwan paid rose by about 70 percent. Electricity prices for large industrial users rose 41.58 percent, while the government absorbed three-quarters of fuel cost increases for households.

It worked, at a high cost to industry and public finances, but it might be harder to repeat.

For one thing, a tight oil market also makes gas more expensive. That might seem odd, as oil and gas are different fuels, but most of the long-term contracts that supply gas to Asia, including those from Qatar and Australia, do not fix a price in advance. Instead, the price of each gas shipment is set by a formula tied to the price of crude oil: When oil rises, gas bought under those contracts rises with it. Taiwan is no exception. CPC Corp, Taiwan, the state-run importer, has said its gas import price formulas are “traditionally linked to crude oil prices,” using Brent crude or the average price of crude imported into Japan as the benchmark.

Australia and Qatar, which together supplied two-thirds of Taiwan’s gas last year, sell mainly on such oil-linked terms.

Aramco estimates that refilling the world’s oil stocks will add about 2 million barrels a day to demand for at least 18 months, keeping oil prices high. Taken together, that means Taiwan will pay more even for gas it has already secured under contract, adding to costs that CPC cannot pass on to consumers.

The Hormuz crisis is not over. Qatar has extended its suspension into early December and its main export plant at Ras Laffan, damaged in March, is still running at reduced capacity. Even when the strait reopens, supply will take time to recover.

Taiwan is entering winter without the supplier that provided one-third of its gas last year.

The short gas buffer matters for Taiwan in three ways:

The first is economic. Gas generates nearly half of Taiwan’s electricity, so a shortage would quickly become a power problem for industry, including the chipmakers at the heart of its economy. Taiwan Semiconductor Manufacturing Co (TSMC) alone uses about 9 percent of Taiwan’s electricity.

The second is fiscal. This year’s shortfall was covered by paying more, and the bill has landed on CPC and the treasury: a projected NT$56 billion (US$1.75 billion) loss for CPC this year and a request for supplementary public funding.

The third is political. The 11-day figure has already been used against Taiwan. In March, posts on Chinese social media claimed that Taiwan was about to run out of gas and officials replied with general assurances rather than figures.

A thin buffer is a vulnerability that others can exploit, even when supply holds.

The government knows the problem. It set a target of 14 days of gas reserves in 2018 and Qatar’s share of CPC’s gas supply has fallen to 11 percent this year.

However, three obstacles have slowed efforts to build a larger gas buffer.

The first is storage. Gas tanks need a port terminal, land, distance from homes, local consent and environmental approval. Planners moved the third terminal, at Guantang Industrial Port (觀塘工業港) in Taoyuan’s Guanyin District (觀音), offshore to protect the Datan algal reef, and it began commercial operations only last year. The fourth faces land contamination problems and the fifth is behind schedule.

Because Taiwan can store so little, it needs about 30 gas carriers to arrive every month, so any delay at sea quickly eats into its reserves.

The second is money. CPC must hold down domestic prices and secure fuel abroad. It expects its seventh straight annual loss this year, with debts above 90 percent of its assets. That makes cheaper, more secure long-term contracts harder to sign.

The third is competition from neighbors. In March, Minister of Economic Affairs Kung Ming-hsin (龔明鑫) said gas swaps with Japan and South Korea were difficult because “everyone is scrambling for cargoes.” Japan and South Korea have since expanded swaps with each other. The Energy Administration has said that Taiwan is open to holding gas reserves in Japan or South Korea, provided the gas can still reach Taiwan when needed.

Three steps could help. The first would be to explore whether CPC’s two roles can be separated. It means funding household price support openly from the budget, as the supplementary funding CPC has requested would partly do, so that the company can focus on securing supply.

The second would be to give storage projects a clear timetable. Environmental and local concerns are legitimate, but regulators could review terminal projects within a fixed time limit, reducing costs and delays.

The third would be to publish the gas reserve regularly. A regularly published figure for days of gas held would make claims like those in March easier to answer and let the public follow progress toward the 14-day target.