PURVIN & GERTZ: ASIA PACIFIC NATURAL GAS DEMAND TO TAKE OFF

Rapidly growing Asia Pacific gas demand through 2010 will dramatically increase competition for imports and indigenous regional supplies, a Houston consulting firm says.

Deregulation of Asia Pacific energy markets, increased environmental awareness, and greater emphasis on economics of interfuel competition are among major factors expected to affect Asia Pacific gas markets for the next two decades, says a study by Purvin & Gertz Inc. (P&G).

Aside from government mandated constraints, future gas prices in each country studied generally will be related to costs of fuels with which gas competes in each end use sector, P&G says.

With regional gas demand expected in 2010 to reach 9.2 tcf, P&G advises Asia Pacific consumers in all sectors to begin negotiating now for long term supplies.

P&G says more than 50% of new regional gas demand through 2000 will come from increased gas usage in power generation. Most new thermal power generating plants planned in Asia Pacific countries will be either gas or coal fired.

But other end use sectors also will play significant roles in future demand growth.

P&G predicts liquefied natural gas demand through the end of the century will increase by 4.2%/year. During 2000-2010, Asia Pacific LNG demand will grow by about 3%/year. Regional LNG demand in 2010 will reach 80 million tons of oil equivalent (TOE), increasing from 67 million TOE in 2000 and 45 million TOE in 1990.

Shortly after 2000, more new LNG export capacity than currently announced will be needed to meet projected demand, P&G says, By 2010, an LNG export capacity shortfall of 20 million TOE is expected, up from 9 million TOE in 2005,

An additional 17 LNG carriers will be needed to meet projected Asia Pacific LNG demand.

For its study, P&G analyzed total energy demand, gas demand, and export potential of 12 Asia Pacific countries. For subregional conclusions, the company organized countries studied into these groups:

• Southern subregion-Australia and New Zealand.

• Central subregion-india, Indonesia, Malaysia, Pakistan, Philippines, Singapore, and Thailand,

• Northern subregion-Japan, South Korea, and Taiwan.

Through the end of the century, P&G forecasts northern subregion national border netbacks of about $1.50-2/MMBTU more in constant 1991 dollars than netbacks in other subregions.

GAS PRICES

P&G says government policies in several countries will continue to influence Asia Pacific gas prices. For example:

• Gas reserves in Peninsular Malaysia may be used only in industrial and power generation sectors. But gas exported to Singapore from Malaysia may not used for industrial purposes.

• In South Korea, the government has ordered use of gas in the residential sector wherever possible because of concern for the environments of urban centers.

• Thailand plans to use its limited gas reserves only in industrial and power generation sectors.

Gas prices in South Korea and Thailand by 2000 are expected to reflect international market oriented energy prices. In Indonesia, gas prices for industrial use will move to levels competitive with alternate fuels.

Gas used in residential/commercial sectors in Australia and New Zealand is priced relative to electricity, in Japan and South Korea to kerosine, and in Taiwan to LPG.

In industrial markets, gas is priced relative to coal in Australia and New Zealand and to fuel oil in all other Asia Pacific countries.

Interfuel competition to provide long term supplies to new industrial boilers could drive up gas prices to 20% more than competing fuel oil, P&G says.

For power generation, gas prices are related to coal in all countries but Malaysia and Singapore. New coal fired power generation plants in Japan, South Korea, New Zealand, Taiwan, and Thailand will require flue gas desulfurization units. By the end of the century, flue gas desulfurization facilities will be required on new, black coal facilities in Australia, P&G says.

Interfuel competition could drive up prices of gas for power generation to 50% above coal on a thermal equivalent.

FUTURE LNG MARKETS

P&G predicts Asia Pacific LNG demand in the early 1990s will exceed supplies under long term contracts. With LNG export facilities operating at capacity, a significant operational disruption will sharply trim supplies.

By 1995, new export capacity in Abu Dhabi, Indonesia, and Malaysia and peak production from Australia's Northwest Shelf LNG project will relieve market tightness. However, gas customers will have a strong incentive to negotiate for long term supplies if shortfalls develop again by the end of the century, as projected.

Future increases of LNG exports from Asia Pacific countries will remain in the region rather than supply U.S. West Coast markets.

P&G says the northern Asia Pacific subregion will import most new gas supplies in the form of LNG.

Japan's share of northern subregion LNG imports will decline to 77% by 2010 from 92% in 1990. During the same time, combined imports by South Korea and Taiwan will increase to more than 20 million TOE.

Gas sales to South Korean power generation markets appear to support expansions and new grass roots LNG facilities in Australia and Indonesia, P&G predicts.

Construction of more LNG carriers will have to begin before the end of the century to meet Asia Pacific demand for LNG.

Besides competing with other LNG projects for ship construction berths, new LNG carriers will have to compete with very large crude carriers and large dry cargo vessels. Because international legislation is expected to require double hulls on crude carriers, P&G projects LNG carrier costs will increase to $390 million/125,000 cu m of capacity in 2010 from $260 million in 1995.

REGIONAL GAS DEMAND

P&G forecasts Asia Pacific gas demand through the mid-1990s will increase by 6.7%/year, slightly above recent growth rates. During the rest of the decade, regional gas demand will increase by 5.2%/year to an estimated 7.3 tcf in 2000 from 4.4 tcf in 1990.

The company says gas use for power generation through 2000 will increase by 5.5%/year, for residential/commercial use by 5.6%/year, and for industrial consumption by 5%/year.

Growth of regional gas demand after 2000 is expected to average 2.4%/year because of:

• Lower economic and industrial growth resulting in part from higher energy prices.

• Maturing of industrialization and increased energy conservation.

• Increased economic competitiveness of coal in industrial and power generation.

• Slower growth of demand for electricity and reduced gas network expansions.

Before 2000, growing demand for electricity and limited generating capacity in India, Pakistan, Philippines, Taiwan, and Thailand will support gas demand for power generation, P&G says.

Development of distribution networks in India, South Korea, and Taiwan will contribute more than 40% of regional residential/commercial demand growth, P&G says. Government policies will blunt residential/commercial gas demand in Malaysia and Thailand.

Petrochemical plant start-ups and expansions of gas transmission networks for industrial uses will increase industrial demand in India, Indonesia, Malaysia, and Pakistan.

P&G says significant regional demand isn't likely to develop for compressed natural gas as a transportation fuel.

NETBACK HIGHLIGHTS

National border netbacks of Asia Pacific countries with gas prices related to oil in some sectors and to coal in others after 2000 will increase more slowly than netbacks of countries where gas prices are related predominately to oil, P&G says.

Malaysia's netback will increase to $5.14/MMBTU in 2010 from $2.90/MMBTU in 1999. Meanwhile, Taiwan's netback will decrease to $5.24/MMBTU from $5.36/MMBTU.

Australia will show the smallest national border netback increase during the forecast period, increasing in 2010 to $3.61/MMBTU from $2.87/MMBTU in 1992. Indonesia through 2010 shows the lowest average netback in P&G's study, increasing to $3.36/MMBTU in 2010 from $1.87/MMBTU in 1992.

P&G says northern subregion national netbacks by 2000 appear strong enough to support new LNG supply projects.

The first incremental increase of LNG export capacity likely will be expansion of the Badak liquefaction plant in Indonesia. Badak expansion shows the highest LNG supply netback to all markets in all time periods, P&G says. Next highest is addition of a fourth train in Australia's Northwest Shelf LNG facility.

P&G says viability of Alaska's LNG project based on North Slope gas will depend on economy of scale. A North Slope LNG plant of less than 14 million tons/year capacity would substantially reduce-and could eliminate-supplier netback, P&G says.

The company says LNG exports from Asia Pacific countries will continue to netback 20-80/MMBTU more than gas exported as methanol. As a result, methanol export projects will be limited to isolated gas reserves not large enough to justify a baseload LNG project.

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