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Asia’s LNG Outlook: Part Two

LNG Industry,


Papua New Guinea and Russia

Papua New Guinea (PNG) could be the new surprise entry into Asia’s LNG supply picture.

The remote Pacific nation’s vision for an export oriented LNG industry has been enhanced by ExxonMobil’s interest in expanding its presence following from Osaka Gas’s decision to pay US$ 204 million for a 40% stake in natural gas assets.

ExxonMobil, which expects to start exporting LNG from its PNG LNG project next year, is in talks with InterOil and Pacific LNG Group to acquire a share of their jointly owned Petroleum Retention Licence 15. Subsidiary ExxonMobil Papua New Guinea also expects to help pay for their drilling of delineation wells in the Elk and Antelope fields, the companies have announced.

‘The transaction has been discussed with the government of Papua New Guinea and any future agreement will be subject to their final approval,’ said InterOil. PRL 15 will supply the natural gas to develop an additional LNG train at ExxonMobil’s existing Konebada site.

InterOil and Pacific LNG are also looking to either independently develop a second LNG project in the Gulf Province that may also use gas from PRL 15 and potentially other discoveries, such as Triceratops, or pursue further development with ExxonMobil Papua New Guinea Ltd.

Since 2010, subsidiary Esso Highlands Ltd has been leading the PNG LNG consortium to drill and develop the Hides natural gas field in the Southern Highlands province. The gas will be piped over 700 km to a US$ 19 billion LNG plant near Port Moresby comprising two trains with a total capacity of 6.6 million tpy.

Earlier, Japan’s Osaka Gas said it had agreed to pay Australia’s Horizon Oil US$ 204 million for a 40% stakein its PNG. Japan’s second largest utility will pay US$ 74 million in cash on completion of the deal and a further US$ 130 million in cash upon deciding to proceed with an LNG project.

The two companies will form a strategic alliance to commercialise Horizon Oil’s net certified reserves and contingent resources of 125 million bbls of oil equivalent and develop acreage covering 7900 km2 in the country’s Western Province.

Pricing: IEA backs Asian calls for change

The IEA has waded into the increasingly controversial topic of LNG pricing by backing Asia’s call to break from the current system that is linked to Brent crude and fuel oil prices. Ironically, Japan, which helped create and defend the decades old oil linked pricing mechanism, is pushing hard for Asia’s LNG to be linked to Henry Hub prices in the US.

To the delight of Asia’s energy importing countries paying the world’s highest oil and gas prices, the IEA has described the current pricing system as a holdover from the 1960s that is increasingly unhelpful to the development of a truly global LNG market. As an indication of the distorted natural gas market, Japan and most of Asia, regularly pay between four and six times the price for the same fuel sold in the US, and at about three times the European level.

This enormous price discrepancy between the three regions has become an issue the past two years as the slowing economies of Japan and other Asian countries have been hard hit by rising energy costs.

In its report, ‘Developing a Natural Gas Trading Hub in Asia’, the IEA found that 88% of the natural gas volume traded in Asia in 2010 was tied to oil indexed pricing.

Producers like Qatar, Russia and Australia as well as companies like UK’s BG Group are opposed to any change, arguing that they need the high prices to justify making large investments in developing risky, high cost natural gas projects over 20 - 30 years.

But, ‘without a competitive spot market for natural gas, there is little incentive and little scope to change current commercial practices,’ said IEA executive director Maria van der Hoeven, in putting forward the case for a pricing system that would be more friendly towards Asia’s consuming countries. ‘The future role of gas in Asia will depend considerably on how the pricing of natural gas is tied to the fundamentals of supply and demand in the region.’

She said the current system ‘leaves consumers and producers with insufficient room to explore different options, and limits the degree to which natural gas can serve as a flexible source of energy for both growing and mature economies.’

The report concluded that Singapore holds the ‘best initial prospects’ to serve as Asia’s gas trading and distribution hub, with Japan, South Korea and China as likely competitors in the future.

Backing the IEA’s call, consultant Deloitte predicted in a separate study that the global LNG markets would shift from oil linked pricing to favour Asian buyers when the US begins exporting the fuel.

According to the study, the US could have as much as 6 billion ft3/d of LNG export capacity with the construction of several proposed terminals. To put this in perspective, Qatar, the world’s largest LNG producer and exporter, has a capacity of 10.3 billion ft3/d or 77 million tpy. The sheer volume of an additional 6 billion ft3/d will exert a dampening effect on world LNG prices.

At the same time, US consumers will not be overly burdened as domestic gas prices are projected to increase only marginally, said Deloitte, whose finding will enhance the case for LNG exports.

‘The projected increase of average US prices from 2016 to 2030 is approximately US$ 0.15/million BTU, while the corresponding price decrease in importing countries could be several times higher. Furthermore, the interconnectivity of gas markets causes price impacts to be felt globally, not just in the countries importing US LNG,’ said Deloitte.

Ultimately, the market will limit the volume of economically viable US LNG exports.

 'As prices in the US firm and prices in export markets soften, the margins between the US and global markets will narrow and limit the LNG export volumes even without government intervention.’

‘The spread is projected to be reduced by US$ 0.84/million BTU if 6 billion ft3/d of exports are sent to Europe under the business as usual scenario based on a US$ 0.15/million BTU average increase in US price and US$ 0.69/million BTU decrease in Europe.’

Deloitte added that the traditional gas exporting countries could suffer a decline in revenue due to price erosion and supply displacement.

Asian consumers, however, should not count on potential US exports to bail them out of paying high prices, experts said at a recent conference in Kuala Lumpur, Malaysia in June.

Shamsul Azhar Abbas, the CEO and President of state owned Petronas, dismissed the idea of ‘cheap LNG’ as a fallacy, while Fereidun Fesharaki, chairman of consulting firm Facts Global Energy, said there will be no supply for Asia if consumers insist on paying Henry Hub prices.

To read the Part One 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/asias_energy_outlook736/


 

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