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

Watching Government: Change in Saudi Arabia?

06/15/2015 International observers are still considering the extent, if any, of changes since Salman bin Abdulaziz Al Saud became Saudi Arabia's king in Janua...

A hundred-year Hail Mary?

06/15/2015 Comparing it to a can't-look-away train wreck, Reuter's financial columnist James Saft, in a June 2 article, viewed the recent issue of 100-year bo...

ExxonMobil’s Liza-1 well encounters oil offshore Guyana

05/20/2015 Esso Exploration & Production Guyana Ltd., a unit of ExxonMobil Corp., reported an oil discovery on Stabroek block 120 miles offshore Guyana.

Kizomba Satellites Phase 2 off Angola starts oil productionwise advantaged projects to the south.

05/11/2015 Esso Exploration Angola (Block 15) Ltd., a subsidiary of ExxonMobil Corp., has started oil production ahead of schedule at the Kizomba Satellites P...

LNG export limits violate US free trade tradition, ExxonMobil executive says

04/27/2015 The US should remove the national interest demonstration requirement for LNG exports to countries with which it does not have a free-trade agreemen...

LNG export limits violate US free trade tradition, ExxonMobil executive says

04/21/2015 The US should remove the national interest demonstration requirement for LNG exports to countries with which it does not have a free-trade agreemen...

ExxonMobil resumes drilling from Point Thomson near ANWR

03/23/2015 Following years of legal wrangling, ExxonMobil Corp. has resumed drilling in the high-pressure Point Thomson gas-condensate field on Alaska's North...

Chevron, Shell among most active bidders in central gulf sale

03/18/2015 Chevron Corp., ExxonMobil Corp., Royal Dutch Shell PLC, and Statoil ASA mostly led the way as Gulf of Mexico central planning area Lease Sale 235 d...

Tillerson: Sound policies needed to buoy N. American energy revolution

03/13/2015 The US government needs to adjust its energy policies to ensure the country realizes all the benefits of the new era of energy abundance, said Rex ...
White Papers

UAS Integration for Infrastructure: More than Just Flying

Oil and gas companies recognize the benefits that the use of drones or unmanned aerial systems (UAS) c...

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

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
Available Webcasts

Operating a Sustainable Oil & Gas Supply Chain in North America

When Tue, Oct 20, 2015

Short lead times and unpredictable conditions in the Oil & Gas industry can create costly challenges in supply chains. By implementing a LEAN culture of continuous improvement you can eliminate waste, increase productivity and gain end-to-end visibility leading to a sustainable and well-oiled supply chain.

Please join us for this webcast sponsored by Ryder System, Inc.


On Demand

Leveraging technology to improve safety & reliability

Tue, Sep 22, 2015

Attend this informative webinar to learn more about how to leverage technology to meet the new OSHA standards and protect your employees from the hazards of arc flash explosions.


The Resilient Oilfield in the Internet of Things World

Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.


Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors


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