Please provide an overview of Asian social/cultural/economic/political climate and its impact on LNG activities in China, India, Korea and Japan as well as any new developments or trends for 2013 that will impact the Asian LNG market.
RW: The International Energy Agency expects global natural gas demand to grow at a rate of 1.6% p.a. over the next 20 years. LNG demand is forecasted to contribute disproportionately to that growth, with demand estimated to increase rapidly through 2020, climbing more slowly thereafter, from c. 250 mtpa today to c. 500 mtpa by 2030. Increasing Asian demand is likely to be a major factor in this movement.
Shorter term shocks, like the Western financial crisis, might dampen demand for certain periods, but in the medium and long-term, a number of factors should tend to enlarge the Asian LNG trade. Increasing Asian prosperity and population will result in greater energy, and so LNG, demand. The Asia Pacific region’s population is estimated to grow by c. 800 million in the period from 2010 to 2040, with India changing places with China on the demographic ladder to become the world’s most populous nation, and the regional economy is set to grow apace. The environmental consequences of increasing energy consumption are being officially acknowledged, finally. With pollution levels in cities like Beijing making front-page news, popular pressure will favor “clean” gas – and so LNG – over “dirty” coal. It is worth noting that China’s coal market alone is seven times the scale of the world LNG market.
The Fukushima nuclear incident led to a shutdown of most of Japan’s 13GW nuclear power generating capacity. That diminished nuclear power’s contribution to Japan’s energy mix from around 30% to 2% last year, with Japanese LNG demand increasing by 15% to help fill the resultant supply shortfall.
What do you think the LNG industry will look like 10 years from now?
RW: Historically, Japanese, Taiwanese and Korean LNG buyers have underpinned the Asian LNG market. Exceptional factors like the Fukushima accident aside, future growth will come in large part from new Asian buyers – especially China and India – which have the potential to require substantial incremental supplies. China’s current Five-Year Plan (2011-15) contemplates a doubling of the proportion of its energy to be supplied by gas to 8% by 2015, with a longer-term goal of a 10% gas share by 2020. Much of this is slated to come from domestic production, with significant volumes also arriving from international pipelines from Turkmenistan and Myanmar, however, Chinese LNG imports are still expected to increase from approximately 18 mtpa today to around 60 mtpa by 2020. In fact, that may underestimate Chinese LNG requirements as it is in part predicated on substantial Chinese shale gas development that might not fully materialize because of the complexities of shale gas development in China above and below ground.
Please provide any additional information pertinent to LNG in your region.
RW: Asian buyers have historically entered into long-term LNG supply contracts priced as a function of the product of an oil price reference, most commonly Japan customs cleared crude, multiplied by a negotiated “slope” factor. However, there is increasing pressure to move from this oil price linkage. New Australian supply capacity will achieve commercial operation during the latter half of the decade and substantial new LNG sources in North America and East Africa will come to market in the foreseeable future. This capacity will compete in markets, such as China and India, which differ from the traditional Japanese, Korean and Taiwanese markets in their price sensitivity. More LNG is anticipated to become available for a liquid spot market and spot-based pricing looks set to become increasingly prevalent. Already, U.S. LNG supply is making an impact, with Cheniere’s Sabine Pass contracts priced as a function of the Henry Hub spot price, currently at historical lows due to the U.S. shale boom. While Sabine Pass volumes in themselves are too small to bring about a de-linking from the oil price, all this is adding to erosion of LNG sellers’ ability to resist departure from oil linkage, or reduction of the slope factor, in long-term-supply LNG price formulae.
Floating regasification terminals offer the prospect of quicker development – say two years – from signature to operation for a LNG carrier conversion against 3 to 5 years for a land-based terminal; easier sea-access; a much reduced space requirement onshore; and lower unit capital costs than a land-based terminal for small to medium-sized volumes. They also offer the flexibility to relocate the regasification vessel, or even use it as an LNG carrier. These attributes are proving attractive to Asian receiving terminal developers. Indonesia brought the first Asian floating LNG receiving terminal (excluding the Middle East) into operation in 2012, with Indonesia’s second such terminal at Lampung under construction, and Malaysia’s Melaka terminal expected to in commercial operation shortly. Advantages of cost and construction time are attracting China and India to consider floating terminals over land-based solutions they previously favored, with a number of terminals in the planning stages in India and construction of China’s first already underway at Tianjin. Further potential terminals in Indonesia, China, India, Bangladesh, Vietnam and the Philippines are in various stages of development.
Monetization of otherwise stranded offshore gas reserves and cost advantages over onshore facilities are factors motivating Asian sponsors to consider LNG floating production storage and offloading (FSPO) units. Several LNG FPSO projects are under development in Asia, with the FEED awarded for Inpex’s Masela project in Indonesia and Petronas’ Kanowit field development offshore Malaysia.