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Asia Pacific LNG: fluid dynamics

LNG Industry,

Asia Pacific has long stood as an important LNG market for both consumers and suppliers. At the start of 2013, regional demand stood at 176.3 million tpa, primarily driven by mature buyers in the form of Japan and South Korea who are now established as primary import market players, together accounting for over half of global LNG demand.

Aside from these established markets, importing LNG is a relatively new phenomenon for other Asian countries: India started in 2005, China in 2006, Thailand in 2011, and Indonesia and Malaysia in 2012. Other Asian countries are also expected to become LNG importers before 2020.

The Asia Pacific region has an established record for LNG supply: Malaysia, Indonesia and Australia contribute over 30% of global capacity. Although some nations have seen a drop in exports due to diminishing natural gas reserves, others, including the likes of Australia, are growing in stature. Maturing markets

The mature markets of Japan and South Korea are widely regarded as the foundation of the Asia Pacific LNG market after establishing strong and stable economic growth based on LNG imports. Although some view these mature markets with limited growth prospects, opportunities still remain. Japan imports the largest quantity of LNG of any nation (87.4 million t in 2012), accounting for around 35% of global demand. However, uncertainty remains as to what extent nuclear power will feature in Japan’s future energy mix following the Fukushima Daiichi disaster and subsequent national shutdown in 2011.

The South Korean energy mix is also sustained by huge supplies of LNG, importing 36.3 million t in 2012. Imports have flatlined in recent years after a sustained period of impressive growth, yet these are still set to grow at a rate of 1.4% annually until 2020. As a result, Korea Gas Corp. (KOGAS) plans to complete its fourth import terminal in Samchuck in 2014, and possibly a fifth in Jeju by 2017, which will boost the Japanese import capacity by over 4 million tpa.

Emerging giants

Although China and India imported just 12% of global LNG supplies in 2012, LNG producers worldwide are counting on burgeoning sales to the world’s two most populous nations. Both countries are moving towards steep growth in their natural gas consumption within this decade and are expected to be the biggest sources of additional LNG demand over the coming years, supporting the bulk of the 78.1 million tpa expected demand growth in the Asia Pacific region by 2020.

China’s growing demand for cleaner fuel, combined with new regasification terminals, has pushed LNG imports to a new high, which saw the country importing close to 13 million t in the first nine months of 2013, up by 23% compared with 2012. This growth is set to continue as China sets out to meet its latest five-year plan to gasify its energy market, calling for the gas share of its energy mix to rise from ~4% in 2010 to 8% by 2015, with a longer-term goal of a 10% share by 2020.

India is also set to play a key role in LNG demand through to the next decade. With many of the country’s largest oil and gas companies looking to expand the country’s LNG regasification capacity, 2013 was expected to mark a turning point for the gas retail industry, which is in growing need of more supplies. The Indian Ministry of Petroleum and Natural Gas said that LNG will account for 41% of India’s total gas consumption in 2012 - 2013 and 50% in 2013 - 2014, rising from 25% in 2011 - 2012.

Ones to watch

Southeast Asia was long considered a gas supply region for north Asia’s traditional LNG markets. However, the region’s rapid economic growth and declining domestic gas production has forced the need for imports. While the region is expected to continue its role as an important supplier of natural gas in the Asia Pacific basin, it is also expected to be a significant consumer of natural gas.

Despite southeast Asia contributing only limited LNG demand in 2013, capacity is expected to grow somewhat exponentially until 2017, topping 51 million tpa. This potential demand has caught the attention of pricing agencies that are now looking to offer a region-specific benchmark with the potential to drive up use of LNG swaps. By doing so, many newer markets can access shorter-term supply as well as the spot market. A key test for governments will to keep prices affordable while still attracting investments in their respective energy sectors.

Game of thrones

The emergence of Australian LNG contrasts the decline of southeast Asian production. Australia will overtake Qatar as the world’s leading LNG supplier, and, by 2020, will have an estimated production capacity of 85.5 million tpa.

However, currency, skilled labour shortages and a tough regulatory environment have all perpetuated cost increases, pushing grassroot projects beyond economic viability. Accordingly, the industry has seen the advancement of floating LNG (FLNG) production vessels that avoid much of the cost inflation through construction outside of Australia.

Six FLNG production vessels are planned offshore Australia, accounting for approximately 23 million tpa of production capacity. Operators are keen to explore this more flexible form of LNG production offshore Australia to develop remote gas resources.

Of course, as buyers look to diversify supply, future LNG supply to Asia Pacific will not be unique to Australia. Shale production in the US and Canada has pushed the Australia out of the top spot for new Asian investment in gas development, with most of the supply from existing Australian projects sold off and buyers hunting for cheaper fuel.

However, expensive liquefaction processes, shipping costs and a substantial outflow of exports is likely to push up US benchmark gas prices, although this has not deterred Asian buyers from signing up to initial US production capacity.

Asian buyers are also keeping a close eye on developments in Russia. Russia is set to flex its LNG muscle after announcing that it will liberalise exports from the start of 2014. China National Petroleum Corp. has acquired interest in the Yamal LNG plant, and other Japanese buyers are looking at further opportunities Russia has to offer.

Feeling the squeeze

As demand for LNG reaches record levels, nations are increasingly concerned about the price of natural gas. As a result of increased LNG spot purchases, Japan’s natural gas bill rose by 13.4% in 2012. China and India are also looking to raise domestic production and diversify gas imports.

Subsequently, these nations are now approaching suppliers to renegotiate supply contracts in the wake of potentially cheaper LNG from the US hitting the market. Now investors are looking for equity in export plants that are focused predominantly on North America to take advantage of the Henry Hub price index. Many view this as a means of switching away from the current oil-linked gas pricing mechanism that has resulted in high gas prices.

Furthermore, nations are beginning to collaborate in order to bring down regional LNG prices. As LNG assumes a greater role, evolving from a premium energy source to a core, widely used and precious one, southeast Asian nations in particular are becoming a significant consuming region, resulting in new opportunities as well as new risks. The question yet remains whether global LNG producers will be able to keep up with this burgeoning demand.


Written by Alex Field, The Energy Industries Council. Adapted to house style by Ted Monroe

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