The Oil & Gas Week
In 2013, Asia consumed just under one fifth of the world’s total natural gas supplies, slightly less than the demand accounted for by all of Europe and Central Asia, according to BP’s latest statistical review. Only the US consumed more gas than either of these two regions. The IEA’s latest World Energy Outlook 2013 forecasts Asian demand growth rate for natural gas at a 4.2% compound annual average over 2011 – 2035, six times the expected OECD annual average growth rate at 0.7%. Asia is “where it’s at” as far as natural gas growth markets are concerned.
While natural gas demand in Asia has risen sharply and steadily since the early 1990s but the market is neither unified in its characteristics nor connected by the networks of pipelines that are common in Europe and North America. As a result, Asia plays an even weightier role in the global liquefied natural gas (LNG) ship-borne market, with Japan, South Korea and Taiwan – the region’s most mature gas consumers – together accounting for some 80% of the world’s total LNG business.
While these mature markets may have limited room for growth, China and India offer enormous opportunities given the size of their economies. According to a China Daily report, the country’s reliance on imported gas is expected to jump nearly 19 percent this year as concerns about air pollution and public health drive demand for cleaner fuels. Then there is Southeast Asia, where growing economies and ranks of consumers will demand more than the region’s producers -- Indonesia, Malaysia and Brunei -- can incrementally supply, as these producers already have committed LNG long term exports to the key markets in Asia.
Among the most critical players in the Asian LNG scene are undoubtedly Qatar and Australia. Qatar, the colossus of global LNG, accounts for almost a third of the global total, selling some 78 million tons per annum (mtpa) in 2013. It ships its LNG to all parts of the world but 70% of its total exports go to neighbouring Asia. While Qatar sold 55.5 mtpa of LNG to Asia in 2013, the other Middle East exporters (Oman, Abu Dhabi and Yemen) sold a further 21 mtpa. Australia sold almost all its output of LNG to Asia as well, amounting to just over 22 mtpa last year.
But profound changes in the market are afoot. While Qatar’s outsize status in the LNG business will remain important, its production is on a long run plateau with no new projects planned and a moratorium in place on new gas projects. Australia -- the up-and-coming contender -- is set to take the lead in the next 3 – 5 years. With some $200 billion of investments in place for LNG projects which come on-line over 2014 – 2018, Australia will reach an estimated LNG export capacity of 85 mtpa, well above Qatar’s. But Australia’s rise in the LNG business will not be an easy one – the country’s mega-projects have been beset by extreme cost blowouts due to an over-strong Australian dollar and ballooning labour and services costs.
Added to Australia’s high-cost worries is the North America’s likely emergence as a major LNG exporter on the back of the US ‘shale revolution’ and the consequent boom in unconventional gas production. And while the US Congress, somewhat belatedly, is evaluating steps to reduce the time taken for regulatory approvals for LNG export projects, major world-class discoveries of natural gas have been announced in Mozambique and Tanzania over the past 3 years. Given East Africa’s strategic position at the edge of the Indian Ocean and within easy reach to Asia’s gas markets, international oil and gas companies such as BG and ENI have an aggressive campaign to establish LNG exports out of the region, aiming for some 20 - 30 mtpa of LNG capacity by 2018/19.
In a report last year, the International Energy Agency highlighted the potential energy security, economic and environmental benefits to Asia of a larger role for natural gas. But the IEA also noted a major challenge: in contrast to oil markets, the global natural gas market is regionally segmented. North America remains a “gas island” effectively isolated from the rest of the world -- at least until it begins to export significant volumes. Meanwhile, Asia’s LNG markets remain imperfectly competitive, with its large importers such as Japan and South Korea effectively limited to importing from a handful of exporters holding significant market power. 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 therefore contributed to Asian buyers paying the world’s highest prices for LNG. As North American LNG exporters enter the market in the coming few years, the high differentials between Asia delivered prices and North America domestic prices will prove to be unsustainable.
These trends put Middle Eastern producers, Qatar in particular, at the forefront of competition in Asian markets with the forthcoming rise in supply from Australia, North America and East Africa. As a well-established large producer with its capital investments already in the process of being amortized, Qatar occupies a strong and entrenched competitive position. Yet, at the margin, the Middle East supplier will be competing with the newer LNG exporters to the region. Key pipeline such as China’s very large 30-year pipeline gas supply deal recently signed with Russia will also play a role in this competition.
“Governments in the region will need to signal their willingness to facilitate competition further downstream,” the IEA report said. “Singaporean efforts to develop a competitive natural gas market and complementary trading hub might be considered small relative to the size of the entire Asia-Pacific natural gas market. However, the example of an alternative market model which is able to adapt global supply changes to the regional market would be a powerful one.”
For their part, Asian countries must encourage these trends towards more liberalised trade flows with and the potential for trading hubs with gas-on-gas competition to replace the long-term contracts now linked to oil prices. How and when these market dynamics play out and the extent to which Asian gas markets become more liberalized, only time will tell. Asia’s economic growth and energy security will ride on the balance.
Dr. Tilak Doshi is a Senior Research Fellow at the King Abdullah Petroleum Studies and Research Center (KAPSARC) in Saudi Arabia.
Opinions expressed are solely Dr. Tilak Doshi’s and do not express the views or opinions of the KAPSARC.
This article was first published in The Oil & Gas Weekly on 29 October 2014
By: Dr. Tilak Doshi
