Gastech ’14: Asian gas buyers seek new pricing, more infrastructure

By ADRIENNE BLUME

Goyang City, KOREA -- The Monday morning panel at Gastech discussed a number of recommendations for securing Asia's gas demand, from a demand-side perspective. Moderated by Nick Milne, First VP and LNG specialist at Bank of Tokyo-Mitsubishi UFJ, the panel emphasized the need to restructure LNG pricing mechanisms and enable destination flexibility for export contracts with Asian buyers. 

Milne outlined several key themes relating to Asian energy demand, including emerging growth in terms of the changing energy mix—specifically, growth in import demand from non-traditional sources, including China, Thailand, Singapore and Indonesia. Diversity of gas supply is another major theme, with new supplies coming from such places as Canada and East Africa. In this vein, the use of new technology to develop gas supply—i.e., floating LNG and innovative GTL technologies—is contributing to the diversification of supplies. "In a world awash with cheap gas, it's easy to see a path forward for gas-to-liquids," Milne commented.

The moderator then posed the question: "How do people position for growing gas demand from Asia?" The percentage of Asian national oil companies (NOCs) in global merger and acquisition (M&A) activity is growing, and is presently pegged at approximately 20%. Three major themes with regard to meeting the growth in Asian demand, according to  Milne, and later discussed by the panelists, are the push for restructured gas pricing, the competitiveness of gas versus other fuels (i.e., coal and nuclear power), and the roles of pipeline gas and LNG in long-term demand and pricing dynamics.

Milne yielded the podium to Young-Sik Kwon, the executive VP and COO of KOGAS' Resources Business Division.  Kwon spoke about Asian gas buyers' strategies for securing cheaper gas. Presently, nearly 70% of global LNG imports are delivered to South Korea, Japan, Taiwan and China; however, high prices make import of the fuel very costly for buyers. To secure cheaper LNG, Kwon said, comprehensive strategies must be built, including the establishment of a gas "portfolio" approach, improving market efficiency and enhancing cooperation among buyers.

A portfolio approach would require the diversification of price formulas and LNG sources, while market efficiency improvements could be secured through linkage to Henry Hub gas prices, increased buyer participation in global LNG project development, and the reduction of shipping costs through destination-free LNG and swap arrangements. The LNG market is systematically inefficient for Asian buyers due to oil-linked formulas, which raises shipping costs, Kwon noted.

The third strategy for securing cheaper gas is to boost cooperation among buyers through joint purchases to secure a competitive LNG price. Pipeline gas would make a positive impact, as it diversifies energy sources; however, the panelist cautioned that importing pipeline gas should be a mid-to-long-term goal, due to price competitiveness, infrastructure requirements and geopolitics. 

To these ends, KOGAS is actively participating in global LNG projects, such as Shell Australia's Prelude FLNG, the Mozambique Area 4 gas development and LNG Canada. KOGAS was also the first Korean company to secure gas exports from Cheniere Energy's Sabine Pass project in the US.

The next panelist to speak was Shigeru Muraki, executive VP and CEO of Tokyo Gas Co. Ltd.'s Energy Solution Division. Muraki provided the audience with commentary on the new dynamics of the Asian gas market.

Diversification was the key word in Muraki's speech—diversification of supply sources and systems, of contractual conditions, and of infrastructure. New supplies from the US, Canada, Mozambique and East Siberia could provide Asia with alternative import sources, while new pricing mechanisms, such as oil-indexed gentle slope, Henry Hub, S-curve, short-term contracts and spot contracts, could provide flexibility in terms of import costs. 

Pipeline connectivity and infrastructure development are other major concerns for Asian gas buyers. Muraki cited the development of a North-to-East Asia pipeline, cross-border pipelines from Russia and Central Asia to China, a pipeline from Russia to Japan and South Korea, and interregional pipelines, as critical options for the development of gas trade. Muraki also noted that the development of regional shale gas and methane hydrate reserves could spur increased inter-regional gas trade.

In Japan, LNG has provided a steady source of gas in the wake of nuclear plant shutdowns since 2011. Nuclear plant restarts will cause the high volume of LNG imports to Japan to decrease to around 70 million tons (MMt) through 2020, from the recent high level of approximately 87.5 MMt. However, nuclear capacity will gradually decline again after 2020, leading Japan to import as much as 100 MMt of gas by 2030, Muraki said.

Hirobumi Kawano, the president of Japan Oil, Gas and Metals National Corp. (JOGMEC), next spoke about shale gas from the US, which could greatly impact global and Asian energy markets, as more export permits to non-Free Trade Agreement countries, such as Japan, are approved for US LNG projects. Canada is also looking to Asia as a potential large market, while Asian buyers are eyeing Russia and East Africa for new supplies, as import dependency expands in China, India and Southeast Asia.

However, high LNG prices are a serious problem, Kawano said. He noted that the cost to transport LNG from Canada to Asia is nearly half that from the US. Most LNG exports to Japan are based on long-term contracts linked to oil prices, which makes Japanese LNG prices much higher than those in Germany, the UK and the US. 

"We need to import LNG from new suppliers," Kuwano said, which is why Japan has been been investing in new gas projects around the world, such as those in Canada and East Africa, specifically Mozambique. "This [supply diversification] could also lead to introducing a new price formula" to lower the price of LNG imports, he said. "We hope this region [Mozambique] could be a new supply source for Japan and for the Asian region."

In concluding his speech, Kuwano noted that JOGMEC successfully completed the world's first offshore methane hydrates production test in March 2013. 

Domenico Dispenza, the president of The International Group of LNG Importers (GIIGNL), discussed emerging trade patterns to Asia. In line with the other panelists, Dispenza confirmed that buyer and seller negotiations are needed to reduce high LNG import prices. 

Traditionally, in Asia, prices are linked to oil. "Could it be possible to fix a global spot market price for LNG?" he posited. Could it also be possible, he asked, to fix a market price in Asia to create a competitive environment? 

The next step to create a global gas market in Asia is to build out the infrastructure, such as pipelines and terminals. "Markets in Asia are isolated from each other, and interconnections are needed from country to country," especially via pipeline, Dispenza said.

Lastly, Sheng Chung Lin, the chairman of CPC Corp., spoke about the Asian gas market transformation. The five major Asian LNG importers—Japan, Korea, China, India and Taiwan—are set to witness a "shift away from coal and oil, to gas, mainly due to environmental considerations," Lin said. Presently, the ratios of primary energy demand in those countries are 58% coal, 25% oil, 8% gas and 9% other energy. 

LNG trade accounted for 10% of global gas consumption in 2012. In the future, "We believe that Asia will be the region to drive global demand for LNG," he asserted. However, Lin noted that ensuring lower prices is critical for Asian LNG importers. 

Weak bargaining power has led to a high premium for Asian importers. An unstable LNG pricing mechanism has resulted from competition between gas and oil, and a lack of substitute energy sources. Henry Hub prices, however, reflect gas-to-gas competition in continental regions. Additionally, destination restrictions in export contracts limit the liquidity of LNG trade, Lin said.  Governments have taken action to restructure LNG pricing mechanisms—i.e., Japan's LPCC and Taiwan's Energy Forum—although increased LNG import costs are eroding national competitiveness. LNG pricing plays a pivotal role in achieving climate change goals and improving economic strength, he said. 

Lin also outlined the differences between buyer and seller aspirations. Buyers want affordability and flexibility, while sellers seek profitability and steady sales. For buyers, massive proposed and new LNG projects may lead to price competition, and large potential pipeline gas reserves could become available from Russia, Central Asia, China, and ASEAN countries. 

From the seller perspective, LNG demand is growing steadily, due to environmental concerns, uncertain nuclear policies, and increasing applications for vehicle and bunker fuels. Long-term prices reflect the rising costs of new LNG projects.

To bridge the gap between buyers and sellers, Lin said the Asian market must be realigned to match the aspirations of both sides. He outlined a "3E" program to achieve these goals:

"LNG is the fastest-growing energy source in Asia, but the LNG price needs to be restructured," Lin said. The chairman concluded his remarks by saying that he hoped his three-part proposal would help bridge the negotiation gap between buyers and sellers and help create a larger, more open and more prosperous gas market in Asia.