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

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...

ExxonMobil ‘winding down’ Arctic well, complying with US, EU sanctions on Russia

09/19/2014 ExxonMobil Corp. released a statement that the company is complying with all US sanctions on Russia after news reports that the operator had halted...

ExxonMobil, Linn to make second asset exchange this year

09/19/2014 ExxonMobil Corp. has agreed to trade interest in 500 net acres from South Belridge field near Bakersfield, Calif., to Linn Energy LLC, Houston, in ...

White Papers

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Plant Design for Lean Construction - at your fingertips

One area which can provide improvements to the adoption of Lean principles is the application of mobil...
Sponsored by

How to Keep Your Mud System Vibrator Hose from Getting Hammered to Death

To prevent the vibrating hoses on your oilfield mud circulation systems from failing, you must examine...
Sponsored by

Duty of Care

Good corporate social responsibility means implementing effective workplace health and safety measures...
Sponsored by

Available Webcasts


On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Utilizing Predictive Analytics to Optimize Productivity in Oil & Gas Operations

Tue, Nov 18, 2014

Join IBM on Tuesday, November 18 @ 1pm CST to explore how Predictive Analytics can help your organization maximize productivity, operational performance & associated processes to drive enterprise wide productivity and profitability.

register:WEBCAST


US HYDROCARBON EXPORTS Part 3 — LNG

Fri, Nov 14, 2014

US LNG Exports, the third in a trilogy of webcasts focusing on the broad topic of US Hydrocarbon Exports.

A discussion of the problems and potential for the export of US-produced liquefied natural gas.

These and other topics will be discussed, with the latest thoughts on U.S. LNG export policy.

register:WEBCAST


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