Asia’s LNG Outlook: Part One

In separate analyses published this year, two oil majors and the US Energy Information Administration (EIA) have reaffirmed previous long term forecasts and trends that natural gas consumption will rise at a faster rate than other fossil fuels with Asia as the main driver as a result of its rapid economic growth, large population and pressure to protect the environment.

With the demand outlook seemingly settled, the experts are focusing their debate on supply issues and the increasingly vexing question of pricing, in particular, why Asia is paying four to five times as much for its natural gas supplies as the US and whether this price gap will last.

Between 2013 and 2017, consultant Douglas Westwood expects the industry to invest a total of US$ 228 billion in LNG facilities, more than double the amount spent over the previous five year period.

At the end of 2011, Qatar held a commanding lead with 77 million t of the world’s total 279 million t of liquefaction capacity, putting it well ahead of Indonesia (34.1 million t) and Malaysia (25 million t), according to the International Gas Union.

Investors are in the midst of building 84 million t of new capacity in many parts of the world, with another 442 million t in various stages of planning and proposal supposedly for completion by 2025 to meet the world’s projected global LNG demand of 474 million t.

But most of the planned and proposed projects will not materialise for a variety of reasons including poor economics, political instability, regulatory and tax uncertainties, partnership disputes, and social and environmental opposition from affected groups. This lack of certainty casts a long shadow over supply planning that in turn will affect future prices and ultimately, demand.

Driven by Japan, the world’s leading LNG buyer, Asian LNG prices have held stubbornly between US$ 15 and US$ 20/million BTU, more than double the range before the Fukushima disaster, encouraging producers and traders to look into developing new long term sources of supply.

But the high prices have also provoked a backlash from Japan and other Asian buyers who now want to link their long term purchases to Henry Hub in the US where natural gas has largely traded at between just US$ 2 and US$ 4 over the last few years. The struggle to set the ‘right price’ for LNG could be protracted and potentially nasty.

Another unexpected development, North America’s ‘shale revolution’ has raised the prospects of the US becoming a major oil and gas producer to challenge the old supply order dominated by the Middle East, Russia, Africa and Australia. Thanks to the mass application of hydraulic fracturing or ‘fracking’ technology to access vast oil and gas reserves buried in deep tight formations, BP believes the world’s shale gas output, led by the US, could more than treble between 2010 and 2030.

But there are analysts who question if North America and other countries can really sustain the high rates of shale gas production for decades that are being forecast by private companies and international agencies.

As if to confirm these fears, Royal Dutch Shell said an unexpected US$ 2 billion write down of its over rated North America shale assets contributed to a 60% plunge in its most recent second quarter net profit. The European major said earnings for the April quarter dove to US$ 2.39 billion from US$ 5.74 billion for the same period last year.

Stating that the written off reserves contained much less oil than originally thought, Shell announced it is seeking to sell off some of its US$ 24 billion worth of shale assets in the US.

Shale gas supplies could also be crimped if global opposition to fracking gathers strength amid widespread accusations that its application has led to the contamination of underground freshwater reserves and triggered earthquakes in different parts of the world.

Meanwhile, the long term security of LNG supplies from three of Asia’s leading producers has become a matter of concern for their customers in Japan, China, South Korea and Southeast Asia.

Indonesia and Malaysia are losing their positions as the world’s second and third leading LNG suppliers due to rapid domestic demand growth and depletion of mature gas fields. Both could become net importers later this decade.

Australia’s LNG fortunes have recently gone into freefall after a decade of boom had attracted more than US$ 200 billion worth of investments in natural gas projects. Ironically, just as LNG prices have surged over the past two years, investors have turned sour on Australia’s rising business cost, tough environmental regulations and severe labour shortages.

The worsening geopolitical conditions in the oil rich Middle East and North Africa along with rising tensions over Asia’s disputed territories are contributing to the race to find and develop natural gas reserves in North America, Russia, Central Asia and the Arctic. Investors are closing in on Mozambique in East Africa and expanding Angola in West Africa, which has just exported its first LNG cargo.

Australia and China

Australia and China, owners of some of Asia’s largest natural gas and shale reserves, provide timely warnings on why there are no sure bets in projecting future LNG supplies.

Tipped to overtake Qatar as recently as last year, Australia is rapidly losing its reputation as an LNG heaven as investors are put off by the country’s high business costs, a tight and inflexible labour market, and tough regulations.

Three of Australia’s biggest long time backers, Chevron, Exxon and Royal Dutch Shell, are slowing down work on their joint US$ 52 billion investment to develop and liquefy offshore Gorgon field’s 50 trillion ft³ of gas reserves. Australia’s largest gas project has been hit by huge cost blow outs, the latest being last December’s US$ 9 billion upgrade from the previous estimate of US$ 43 billion.

In April, Australia’s own Woodside Petroleum cancelled plans for a US$ 45 billion onshore LNG export plant in Browse, citing high construction costs, while it investigates the possibility of building a much cheaper floating terminal instead.

Also at risk of implementation delays are the Shell-PetroChina Arrow project in Queensland, the ExxonMobil-BHP Billiton Scarborough floating terminal and the GDF Suez-Santos Bonaparte floating project.

Japan’s Ichthys LNG project in northern Australia could be next as it is running 18 months behind schedule and on course to exceed the original US$ 34 billion budget by as much as US$ 10 billion, according to Hong Kong based Bernstein Research.

It has not helped Australia’s cause that the shale revolution in North America has caught the eye of these global players and their mostly Asia based customers seeking supply diversification and lower LNG prices.

Wood Mackenzie projects that by 2025, the US could start up 136 million t of liquefaction capacity while Canada will have 35 million t to account for 45% of the world’s total of 376 million t.

With further supply competition from East Africa (40 million t), Russia (28 million t) and others (75 million t), he said Australia’s projected 62 million t capacity addition would likely come from the expansion of existing facilities or construction of floating LNG (FLNG) terminals.

But as a result of past investments, McManus predicts Australia will still capture approximately 25% of the world’s LNG market by 2018, up from 7% in 2000. However, it will be challenged to expand market share as big buyers like China and Japan, which previously did not have much alternative, are actively seeking out new suppliers.

Australia has secured approximately US$ 180 billion worth of committed LNG projects with another AUS$ 120 - 150 billion under evaluation that could easily be dropped or delayed indefinitely, said industry executives.

With the world’s largest unconventional gas reserves, China could be the most successful country to develop shale gas outside North America, predicts BP.

From almost nothing, China’s shale gas production is now projected to grow to six billion ft³/d or 2.19 trillion ft³ by 2030, accounting for 20% of the country’s total gas output, said BP. The Chinese government has set a more ambitious target to produce 230 billion ft³/y of shale gas by 2015, rising to 3.53 trillion ft³ by 2020.

However, even BP’s projections for Chinese shale gas output may be beyond reach as the government has just barely begun work on developing a comprehensive regulatory and legal system to attract investment into this unchartered territory.

Unlike the US, China does not have ready infrastructure to facilitate a shale revolution. The development of infrastructure will be costly, rendering shale gas immediately uncompetitive against imports through pipelines and regasficiation terminals.

The Chinese government will also be looking nervously at the growing number of lawsuits and rising environmental opposition in the West to fracking that could yet stymie the global shale revolution. China will face bigger domestic opposition as its water resources are under greater pressure than the West from rising consumption and pollution.

To read Part Two of this article online, click here.

The full article can be found in the October issue of Hydrocarbon Engineering.

Read the article online at: https://www.lngindustry.com/liquid-natural-gas/10102013/asia_lng_outlook735/