LNG: Security of Gas Supply Will Matter in 2012
The market is going to get tighter and tighter starting second half of this year given the slow-down of new LNG coming into the market. Only 48 million tons of new capacity will come online between now and 2014, which is not enough to offset the growing Asian LNG demand. As a result, countries heavily reliant on LNG will get very nervous, and worried about security of supply. Gas is already a political issue, but four possible geopolitical shocks could further tighten the global LNG balance this year leading to higher global LNG prices and a shortage of ‘flexible-divertible’ LNG supply: 1) Continuing nuclear crisis in Japan with lasting extra call on LNG; 2) Concerns of a reemerging Arab Spring threat that could potentially impact supply in Algeria and Egypt; 3) Iran’s threat to block the Strait of Hormuz that could affect about 30% of world’s LNG trade; 4) Increased attacks and sabotage on Yemen’s natural gas infrastructures suggest that the 6.7 million tons per year Balhaf liquefaction plant could gradually become unreliable.
Asian LNG buyers will be the most affected by these geopolitical and political risks confronting key gas exporting and importing countries. Asia has the world’s fastest growing LNG consumption supported by record levels of LNG imports into Japan post-Fukushima, but which is also driven by the booming economies of China and India, along with the growing niche market of South East Asia. Japan, Korea, and Taiwan (JKT) together accounted for 52% of the global LNG trade in 2010 and 84% of Asia Pacific trade. Natural gas will continue to play a major role in Japan's energy portfolio, substituting for nuclear energy in the medium-term. But by 2030, JKT’s share of global and Asian trade is projected to decrease to 37% and 59% respectively. By contrast, together China and India could represent around 32% of Asian trade by 2030. There will definitely be an uptick in Chinese demand in the coming years for both contracted LNG volumes and spot purchases. The 12th FYP goals call for 260 billion cubic meters (bcm) of gas demand in 2015 with domestic output planned at 170 bcm. Similarly, India's natural gas needs are expected to reach 88 bcm by 2016 and 132 bcm by 2030, compared to 63 bcm in 2010. For both countries, this surge comes predominantly at the expanse of coal, even if coal remains the dominant fuel by far in their power generation mix. In addition to this North Asian demand, South East Asia is becoming a major importer of natural gas, notably via LNG with five Southeast Asian nations set to import LNG by 2013.
Japan is by far the most vulnerable LNG market. Japanese LNG demand has never been higher and LNG imports will still max out this year. Even if Eurasia Group's basecase scenario for nuclear reactor restarts plays out and the government brings nuclear power back online gradually, demand for LNG and other replacement fuels will remain high this summer and likely through the rest of the year. LNG imports are likely to be higher than 2011 and reach a record 87 million tons as utilities continue buying historically large quantities of LNG to guard against the risk of few or no reactor restarts. With this increased reliance on LNG imports, Japan will remain highly vulnerable to developments in the global LNG market and critically dependent on flexible supplies available through spot purchases. If a rush of restarts occurs, which is unlikely, Japan's utilities will stop buying spot cargoes and could opt to resell excess LNG back into the market, possibly causing a glut. In a zero nuclear case this year, gas would account for 42.1% of the power generation mix. In the medium-term, gas-fired capacity will increase with about 20 GW planned by electric companies. There are also more than 15 LNG regasification terminals undergoing expansion or under construction.
This has led the Japanese government to rethink its long-term post-Fukushima gas strategy, focusing on guaranteeing stable and diversified procurement of LNG and eliminating the Japanese gas pricing premium via measures such as joint procurement of LNG and self-developed LNG. As a result, Japanese utilities are getting more involved upstream and are developing new Japan-made projects such as Inpex's majority-owned Ichthys LNG project in Australia and Abadi LNG in Indonesia. Those self-developed LNG projects are helped by a strong yen and government funding. Osaka Gas announced at the end of March that it received $302 million in financing for a 1.25% stake in Australia's mega Gorgon LNG project. Gorgon stake will give Osaka the right to offtake 187,000 tons of LNG a year in addition to the 1.3 million tons it already has purchased under long-term contracts. Japanese companies are also eying stakes in recently announced LNG projects in Canada's Kitimat LNG, and in Mozambique.
As demand for natural gas accelerates in Asia and new trade patterns emerge, the growth of the LNG trade will depend on continued geopolitical stability and open sea lanes. Asian gas buyers are developing aggressive import strategies that could spur competition and geopolitical strains, but which could also create opportunities for cooperation. Both Korea and India have already secured US LNG supply from the Cheniere’s Sabine Pass liquefaction project in the Gulf Coast. Tensions in the disputed areas of the South China Sea are likely to persist this year, driven by nationalistic pressures in the individual countries and a desire on the part of Vietnam and the Philippines to hedge against the potential rise of China as a regional hegemon. Amid the territorial tensions, however, there also signs of cooperation. Japan and South Korea are showing signs of cooperation with efforts to jointly procure LNG, in the hope of lowering import prices.
Another key geopolitical angle for Asian gas is the big push from Russia, which is trying to export more gas to the east, by adopting a notably more aggressive approach to gas sales to post-Fukushima Japan. Russia remains committed to developing a long-term gas relationship with China, but other Asian markets beckon as well. Russia is moving ahead with a new export LNG project, the 10 million tons per year Vladivostok LNG. Negotiations with the Japan Far East Gas Company, a consortium of five Japanese firms, have moved fast from a feasibility study to development of the investment rationale. If the partners decide to go ahead, a landmark decision on the project could be made this year before the Asia-Pacific Economic Cooperation summit meeting, which is being held in Vladivostok in September. First LNG could be online by 2017.
Leslie Palti-Guzman is a natural gas analyst at Eurasia Group, a global political risk research and consulting firm headquartered in New York