Outlook for global LNG trade growth dims just when it needs to
The outlook for global gas trade has dimmed of late, largely because the Asian economic downturn caused expectations for LNG demand in that region to lose their luster. But that may not be such a bad thing after all, given the growing likelihood of a big surplus in LNG capacity emerging in the coming decade.
The outlook for global gas trade has dimmed of late, largely because the Asian economic downturn caused expectations for LNG demand in that region to lose their luster.
Still, given the growing likelihood of a big surplus in LNG capacity emerging in the coming decade because of a plethora of new projects, those diminished expectations may prove to be a good thing after all.
While worldwide gas demand growth has outpaced that of oil demand two to one during the past decade, development of a global gas market continues to lag, according to Fereidun Fesharaki, a leading analyst of the Asia-Pacific energy sector and president of FACTS Inc., Honolulu.
In an analysis of global gas supply, demand, and trade that he presented at GasTrade '99 in Abu Dhabi recently, Fesharaki notes that, while more than half of the world's oil is traded internationally, over 80% of the world's gas production is consumed within the country where it is produced. Within international gas trade, 75% is via pipeline-notably to the US and Western Europe-and the rest is as LNG. Global trade in gas started at the level of 4.4 bcfd in 1970 and has risen to about 43 bcfd in 1998. Correspondingly, LNG's share of that trade has jumped from about 6% in 1970 to 25% in 1998.
Asia accounts for about 75% of the world's LNG trade and has similarily dominated the growth in LNG demand during the 1980s and 1990s. Japan alone accounts for almost two-thirds of LNG demand today, while South Korea is the only other country with a market share in double digits.
The Asia-Pacific region also dominates in LNG exports, with Indonesia, Malaysia, Australia, and Brunei together accounting for more than two-thirds of the market.
Asian market growth
Fesharaki contends that, even with the remarkable growth rates seen for gas consumption in Asia during 1988-98 (7%/year vs. a 2%/year worldwide average), natural gas remains greatly underutilized in the region.
"The pattern of primary energy consumption in Asia, especially that of natural gas, is dramatically different from the world's picture," Fesharaki said. "In the global consumption patterns, oil comprises 40% of total energy use, coal is a close second with 27%, and natural gas is in third place with 24%. Nuclear power and hydroelectricity compose a small component of the total."
That picture shifts dramatically for Asia when China and India are included: "Coal now accounts for the largest share with 44%; oil in percentage terms equals its global share, but natural gas consumption is only 10% of total energy use. Indeed, the region has the lowest dependency on natural gas compared to every important geographical division in the world. The overwhelming influence of India and China as key energy consumers, especially coal, overshadows the regional pattern. If these two countries are excluded from the regional commercial energy consumption mix, the share of natural gas increases to 16%, which is still less than the global share. Without China and India, the share of oil also expands to 52%, which is larger than the global rate of utilization, while the share of coal shrinks to 20%.
Fesharaki cites a number of factors for the underutilization of gas in Asia: a lack of "pre-existing gas-user culture" that existed in North America and Europe for light and heat (town gas); Asia's centralized energy infrastructure came much later and along electric power distribution lines. Another stumbling block was the high up-front capital investment needed to transport natural gas-especially for multinational firms exploring for hydrocarbons in Asia, which preferred to develop oil because of its quicker return and easier marketability.
All of these hurdles notwithstanding, Asia's longer-term gas prospects remain bright, especially for LNG trade.
"While the LNG market dominates Asian gas trade, its market is relatively young and limited. Thus, each player and every change in supply and demand conditions have significant impacts on the development of the market and the future of natural gas," Fesharaki said. "For example, there are only three Asian countries currently importing LNG: Taiwan, South Korea, and Japan. It is no coincidence that these are the most advanced economies in the region or that all three lack indigenous fossil fuel resources. The Asian LNG market is the result of explicit government policy, as it has been elsewhere."
Much of the growth in LNG consumption in Asia will come in India and South Korea and, to a lesser extent in Taiwan and in emerging markets such as China, Fesharaki said (see table below).
Givent that a robust outlook for Asian LNG has prevailed for years-spurring a flurry of project proposals in the 1980s and 1990s-how then has the Asian economic downturn affected that outlook?
"The impact of the Asian economic crisis on the LNG business in the region is subtle," Fesharaki said. "On the one hand, the crisis did not cause a decline in demand, except for South Korea. On the other hand, the crisis forced suppliers to reassess the market and their plans for future build-up."
If the Asian crisis had not happened, and all or most of the potential projects had gone on stream to feed what was then projected as future LNG demand, then a capacity surplus likely would have emerged worldwide (see chart below). These projects would have resulted from a doubling of gas reserves in the Asia-Pacific region since 1976, expectations of robust demand growth owing to still-surging economies, generally favorable oil prices, and market strategies.
The likely oversupply is changing the structure of the LNG industry, Fesharaki contends. "The power of buyers is increasing, and several importers have attempted to change the traditional terms in LNG contracts
"Still, the outlook for gas in Asia is extremely bright. Almost under any scenario, gas demand is expected to be the fastest-growing segment of demand bolstered by both energy needs and environmental considerations."
OGJ Hotline Market Pulse
Latest Prices as of December 30, 1999
Nymex heating oil
IPE gas oil
Nymex natural gas