Asia a vital source of LNG demand

Australian Financial Review, October 2011

Asia represents an important, and potentially vital, source of LNG demand. It is the part of the world with the fastest economic growth rates, not just in China but in other fast-industrialising high-population countries such as India, Indonesia and Vietnam; and in most cases, these countries face a shortage in energy.

Today, though, it’s the more mature markets in Asia that constitute the greatest demand. “The main users of gas in Asia currently are Japan, Korea and Taiwan,” says Sonia Song, regional head of oil and gas research for Asia Pacific at HSBC. All three of them purchase their gas in LNG form, in prices linked to oil. Japan in particular is a growing market for gas demand, partly because of the problems it has had with nuclear energy. “With the Japanese nuclear moratorium, there has been a step change in demand for gas, which we expect to continue in the long term,” says Song.

For the future, though, it’s the high-growth markets that should provide the more dynamic demand for LNG. China, for example, is showing increased demand, and has also agreed to oil-linked prices for long-term contracts. “Some of these give a degree of upside protection to China, but prices remain oil-linked, just with a lower sensitivity,” Song says. “We expect Chinese demand for gas to grow at around 10% a year.” Specifically, imports of LNG are expected to double to 40 million tonnes per year by 2015, and double again by 2020.

India is another important potential market. India does have impressive domestic gas supply – 126.1 million standard cubic feet per day in the 2011 financial year – but imported LNG has been increased at a compound average 7% a year since 2007, and stood at 33.1 million standard cubic feet per day in FY2011, according to India’s Ministry of Petroleum and Natural Gas. “With domestic supplies likely to be stable, increased demand for gas in India will have to be satisfied by increased imports of LNG at the regas [regasification of LNG] terminals in Dahej and Hazira,” says Song. New import terminals are being built in Dhabhol and Kochi, which gives a clear indication of the momentum India expects in LNG imports. But India’s perennial struggle is infrastructure development, and its attempts to boost its own gas distribution networks have made slow progress.

The impact of this demand on Australian LNG exporters is interesting, and being closely watched by analysts and fund managers. “Australia is in a very nice sweet spot in terms of power demand,” says Malcolm Smith, Director at BlackRock in London, and part of the commodities team there. “But it remains to be seen exactly how much demand for natural gas there will be in Asia. You are seeing more natural gas and coal-based methane coming on in the Chinese market. And a huge amount of new supply has come to the market, mainly US-based from shale gas. When I speak with Australian analysts they are incredibly bullish, and there may be a good story, but it is too early to say for sure.”

Also on the supply side, a potentially very significant project is taking shape in Asia itself, in Papua New Guinea, where the PNG-LNG development – one that should completely transform the PNG economy, for better or worse – is about half way through its construction period. Nomura says it expects delivery of PNG LNG by early 2014; its confidence in the project is one reason it recently upgraded Oil Search, the Australian company most closely linked to the project, to buy. Oil Search itself says the project is expected to produce 6.6 million tonnes per annum of LNG, and that 9 trillion cubic feet of gas – in addition to 200 million barrels of associated liquids – should be produced over the project life. The gas will be liquefied at an LNG plant near Port Moresby and then shipped to international gas markets.

There are many other plants under development too, but HSBC believes it’s still going to fall short of growing Asian and European demand. “We believe that the number of new liquefaction plants currently planned will be unable to meet this demand and so Asian buyers will be in competition with Europeans leading to a tight market for spot LNG cargoes,” says Song. “We have already seen signs of this trend emerging with several LNG cargoes with default destinations in Europe being diverted to Asia.”