Asia's energy supply landscape could be fundamentally changed by the "unconventional" natural gas boom in North America of recent years, potentially seeing a major shift not only in sourcing, but also--and critically--in pricing.
While natural gas prices in the US have hovered around US$3-4/MMBtu(million British Thermal Units) in recent years, Asian buyers typically pay three to four times more for delivered LNG (liquefied natural gas). Japanese LNG import prices in 2011 exceeded US domestic gas prices by some US$11-12/MMBtu, providing ample incentive for North American producers to liquefy and ship natural gas to Asia.
There will be no shortage of demand for the North American product. According to the International Energy Agency, Asia's demand for natural gas will grow at an annual rate of 3.3 percent, while world gas demand will increase at last than half the pace. Asian demand will constitute over a quarter of global gas demand by 2035, compared with its 18 percent share today.
Factor in also two other crucial supply and demand developments in the region, first of which is the impact of the 2011 Fukushima nuclear disaster on Japan's LNG demand. The shutdown of a majority of the country's nuclear reactors to date has meant that its gas-fired units are put on full tilt and its LNG demand has increased sharply. Japan's LNG needs beyond the medium term will be dictated by the decision on its nuclear future.
Secondly, Indonesia and Malaysia, two of the world's largest gas exporters, are experiencing dwindling supplies from their ageing fields. Add to that their rapidly increasing domestic natural gas demand and both appear set to begin importing LNG even as they continue to export contracted LNG cargoes. They have each completed their first LNG import terminals.
The combined effect of the North American gas glut and the Asian demand surge has been to widen natural gas price differentials between North America and Asia. While Asian prices were generally on an uptrend, recent North American spot prices have collapsed to US$2-2.50/MMBtu.
Yet, while the shale gas development is a potential game-changer, challenges remain.
In theory, gas liquefaction capacity in North America could exceed 20 Bcf/d (billion cubic feet per day) by 2020 if all of the proposed export projects go through (by way of comparison, the liquefaction capacity of Qatar, currently the largest LNG exporter in the world, is 10.7Bcf/d).
However, most proposed LNG export projects are still awaiting regulatory approvals. In the US, only the Sabine Pass LNG terminal has received full export approval, while a handful of other projects have received initial approvals to export to countries with free trade agreements with the US. In Canada, two LNG export projects have received export licenses but are still awaiting approval from provincial regulators.
For LNG exports from the US or Canada to Asia to be economically viable, additional liquefaction and shipping costs must be covered. The break-even export price is approximately US$10/MMBtu for US Gulf Coast terminals and US$8.50/MMBtu for Canadian West Coast export terminals, both considerably less than recent Japan-delivered prices of US$16-$16.50/MMBtu.
Large Asian gas consumers such as Japan and South Korea source their LNG imports from a limited number of countries which hold significant market power and to date have been able to dictate prices. Moreover, the pricing formulas of most long-term Asian LNG contracts tie natural gas prices to the price of crude oil, which has been high in recent years and has further contributed to Asian buyers paying the highest worldwide prices for natural gas.
If North American gas exports threaten the market shares of existing exporters into the Asian LNG market, then those established sources have the option to reduce prices to undermine the North American threat a while continuing to make profits. North American LNG exports are, however, likely to be competitive against newer supplies expected from Australia.
Australia's large LNG projects coming onstream from 2015 will propel it to unseat Qatar as the world's largest LNG exporter, but these projects have suffered massive cost overruns due to labor shortages, regulatory burdens and the strength of the Australian dollar.
As North American producers enter the Asian market, the current Asia-US price differentials of more than US$10/MMBtu will become unsustainable, given that differentials of only around US$4.50-6/MMBtu will make trans-Pacific LNG trade viable. The North American gas supply push may eventually challenge the very basis of Asian LNG pricing: The use of oil-indexed formulas.
Singapore becomes an LNG buyer after its import terminal comes online next year. It will join other Asian customers that have an interest in diversifying gas supplies from the handful of sellers currently dominating the market. Like other gas importers in the region, it could have the option of buying at least some of its gas based on US domestic market pricing formulas rather than on oil-linked indices.
This article was written by Dr Tilak Doshi from the Energy Studies Institute. He is Principal Fellow & Head, Energy Economics, Energy Studies Institute in Singapore, and will be moderating at the Singapore Energy Summit at SIEW 2012, as well as the ESI Roundtable, "LNG in Asia: At the Crossroads".
BY: Dr Tilak K. Doshi, Energy Studies Institute