Deregulation of Asia's gas markets creating LNG supply-demand uncertainties


TOKYO�A report by an influential Japanese think-tank has cast serious doubt on the stability of the future LNG supply-demand balance in Asia. The report, by the Institute of Energy Economics Japan (IEEJ), contends that not only will LNG supply far exceed demand by 2010, but also deregulation of natural gas and electric power utilities in Japan, South Korea, and Taiwan will lead to the emergence of a host of small-lot buyers for whom pricing, and not supply stability, will be paramount.

Regional LNG demand has substantially recovered from the decline that followed the economic crisis of 1998. At the same time, India and China have, since the second half of 1998, made full-scale moves to establish LNG import infrastructures. As a result, Asia's LNG demand is likely to grow to more than 100 million tonnes in 2010. (IEEJ's regional low-demand case now puts demand at 105 million tonnes in 2010, while its high-demand case places demand at 112 million tonnes.)

The report also notes, however, that the combined liquefaction capacities of existing LNG plants and projects under construction or in the planning stages total 190 million tonnes/year. Even if the residual reserves in Indonesia's Arun gas fields were shut down, this would only reduce liquefaction capacity by a mere 12 million tonnes/year, leaving potential total LNG capacity in the region at 178 million tonnes/year, far exceeding projected demand.

Market opening
A number of the region's top LNG consumers�most notably Japan, South Korea, and Taiwan�have initiated moves towards deregulating their gas and electric utilities.

In Japan, for example, under the amended Gas Utility Industry Law, gas supplies to large industrial users are liberalized. At the same time, town gas companies are now obliged to initiate specific wheeling rules and charges for third-party users. And under the amended Electric Utility Industry Law, independent power production has been introduced, as has the partial liberalization of electricity retailing.

As a result of these measures, a number of foreign companies, trading houses, and large industrial users have announced moves into Japan's electricity retail business.

In South Korea, LNG demand growth has come largely as a result of competitive pricing. This has been achieved via so-called "internal compensation," however, whereby utility Korea Electric Power Co. pays a higher price for the LNG it uses. Therefore, if the government does proceed with its plans to break up and sell off the state utility (OGJ Online, May 31, 2000), LNG suppliers will obviously find it much harder to maintain competitive prices.

To exacerbate the situation, the government is also looking to privatize Korea Gas Co. (KOGAS), the nation's sole LNG importer. Clearly, the split-up of KOGAS will lead to competition among several LNG importers and wholesalers.

Taiwan's state-owned electric utility, Taipower, meanwhile, has been choosing its LNG suppliers through competitive bidding since last year. As a result, at least one private consortium�whose owners include TotalFinaElf SA, Royal Dutch/Shell Group, and ExxonMobil Corp.�has signed a memorandum of understanding to import 4 million tonnes/year of Australian LNG starting in 2003, by-passing the state-owned oil and gas company Chinese Petroleum Corp.

Market fallout
This regional deregulation, contends the IEEJ report, has led to increasing uncertainty over the outlook for LNG demand and to a proliferation in smaller-lot LNG buyers. Taken together, these factors are threatening LNG's price competitiveness over rival fuels, says IEEJ.

Deregulation also marks a fundamental change in the Asian LNG market, which has traditionally been marked by LNG procurement on the part of large utilities whose primary concern is a stable supply. For the small-lot buyers, pricing, and not supply stability, will be paramount, says the institute.

Moreover, although China and India have made significant moves towards full-scale importation of LNG, worries remain about their ability to pay for these imports in hard currency. The report notes that these two countries' economies are less developed than Japan's, South Korea's, and Taiwan's were by the time they started LNG imports (per capita gross domestic product in 1990 dollars stands below $1,000 for China and India, compared with $3,000-10,000 for Japan, South Korea, and Taiwan when they began importing LNG).

All this is likely to lead to a radical shift in the way LNG buyers and sellers conduct business, says IEEJ. For a start, it is likely to lead to increased flexibility in take-or-pay clauses, allowing for adjustments in short-term supply and demand. Contract terms�typically at least 15 years�are also likely to be shortened, allowing for contract volumes to be more quickly and accurately reviewed, predicts the institute. At the same time, buyers are likely to purchase LNG from existing fields where debt servicing has been completed, allowing for more favorable terms.

The report notes that, in 2010, seven major LNG contracts are set to expire, and buyers are likely to take advantage of the buyer's market that is expected to be in force at that time in order to push for substantially better terms.

Supply considerations
LNG suppliers are also changing their modus operandi. They are becoming increasingly aware of the need to reduce costs to strengthen competitiveness.

A number of them, such as Oman LNG LLC and Malaysia LNG Tiga Sdn. Bhd., have begun to initiate LNG projects at their own risk before securing buyers for all of the project output. Producers are also carrying out small-scale, low-cost projects (in the 3 million tonne/year, $800 million range), because demand can be secured more easily.

The report warns, however, that increasingly flexible LNG deals and competitive bidding can increase the difficulties involved with starting up capital-intensive greenfield projects, thus posing a pitfall that demand may not be met. It notes that such projects currently under planning account for well over a third of total projected supply in 2010.

Related Articles

Second ExxonMobil crude tanker nears service

01/12/2015 The second of two new US-flagged crude oil tankers belonging to SeaRiver Maritime Inc., the marine affiliate of ExxonMobil Corp., has been built an...

ExxonMobil forecasts 35% higher world energy demand by 2040

12/15/2014 A significantly bigger global middle class, expanded emerging economies, and 2 billion more people will contribute to 35% higher world energy deman...

ExxonMobil forecasts 35% higher world energy demand by 2040

12/10/2014 A significantly bigger global middle class, expanded emerging economies, and 2 billion more people will contribute to 35% higher world energy deman...

Firms' third-quarter earnings climbed amid lower crude oil prices

12/08/2014 A sample of 58 oil and gas producers and refiners based in the US recorded a combined 38% jump in profits for this year's third quarter compared wi...

Chapman to succeed Pryor as ExxonMobil Chemical president

11/24/2014 Neil A. Chapman is expected to assume the roles of president of ExxonMobil Chemical Co. and vice-president of ExxonMobil Corp. following the retire...

Induced seismicity research effort identifies information gaps

11/10/2014 A federally coordinated effort to determine whether oil and gas activities are related to growing reports of induced seismic activity has identifie...

ExxonMobil, Linn to make second asset exchange this year

10/06/2014 ExxonMobil Corp. has agreed to trade interest in 500 net acres from South Belridge field near Bakersfield, Calif., to Linn Energy LLC, Houston, in ...

ExxonMobil 'winds down' Arctic well, obeys sanctions

09/29/2014 ExxonMobil Corp. released a statement that it is complying with all US sanctions on Russia after news reports that the operator had halted operatio...

AAPG ICE: ExxonMobil outlines international approach to unconventional development

09/22/2014 Global energy demand is expected to increase 35% to 2040, translating to 120 billion boe/year, or nearly 350 million boe/d, stated Rocky Becker, vi...
White Papers

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts


Prevention, Detection and Mitigation of pipeline leaks in the modern world

When Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST



On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected