Asean LNG demand to grow five-fold over next decade
Demand for LNG in the resource-rich countries that make up the Asean region is set to explode
For over three decades, Asean has been one of the major exporters of natural gas. That’s led to economic growth of over 5%/year in the last two decades in the region. Now, with growth expected to accelerate even more during the coming decades, demand for energy in the region is rising.
Coal and natural gas from domestic production and pipeline imports will help meet growing energy demand but won’t be enough. Several Asean countries are starting to import LNG. If current forecasts prove true, the region will become the largest LNG importer after Japan and China.
Realising the huge potential in this segment, many regional national oil companies (NOCs) are setting up LNG regasification plants to meet the projected demand. It is estimated that within the next five years, Asean will witness a sharp increase in LNG regasification capacity. Assuming an estimated capital expenditure of $350/metric ton for onshore capacity, the capital investment in regasification facilities can hit a sizeable $9bn.
However, given that the average utilisation rate of regasification capacity globally ranges between 35% and 45%, companies that are planning greenfield investments in regasification facilities need to be mindful of the emerging demand-supply dynamics.
Beyond costs, some key considerations for NOCs setting up a regasification facility include:
Onshore or offshore facility: NOCs are beginning to recognise the benefits of a floating facility, including lower capital expenditure and shorter lead time to bring the facility online. There is also the option to lease from the manufacturer without the capital investment to develop the plant.
Tolling model: options for tolling models range from fully integrated ones to pure-play regasification terminal operations, where the operator manages the facility for a fee for a third party. This third party also takes responsibility for the procurement of LNG and the subsequent sale of natural gas to customers.
Build-in flexibility in the plant to reload cargoes: the current volatility in LNG prices offers traders the opportunity to buy at low prices and store for later usage or sale. By having flexibility in the regasification terminal to be able to re-export LNG, the operator can rent out spare storage capacity.
Shipping: own or charter: it may be tempting for regasification operators to invest in LNG tankers. However, the over-optimistic forecast of LNG demand previously, which led to the ordering of LNG carriers, has resulted in the current oversupply of carriers in the market. Shipping rates fell to near five-year lows in the first half of 2015. While increasing demand for LNG may result in some adjustment of current oversupply, the widespread geographical dispersion of buyers and sellers can lead to optimisation of LNG supply, particularly through cargo-swapping. This may ensure the surplus capacity persists beyond the next three to five years.
Contractual terms: air-tight agreements with the midstream companies are essential to protect the operator from losses caused by delays in building facilities. Also, agreements with customers must provide for adequate pass-through of any future increase in prices, particularly since most such contracts with suppliers are drawn up with reference to indices such as Brent crude oil, Henry hub or spot prices, which tend to be volatile.
Driver of future LNG demand growth moves to Asean
As Asean’s demand for LNG is forecast to increase in the next decade, the region’s role in the global LNG trade is also expected to expand significantly.
South Korea’s demand for LNG has fallen by 15% this year owing to the switch to coal and restart of nuclear facilities. Japan has also restarted a nuclear plant, the first since they were all closed down following the earthquake of 2011. While China’s demand is forecast to remain healthy, it has already contracted a large portion of its import needs till 2020. That leaves only two bright spots – Asean and India – which have yet to enter into deals for forecasted demand.
Singapore’s effort to become Asia’s LNG trading hub is expected to increase trade across Asean. The country has been making headway in attracting oil and gas and LNG traders to set up trading desks in the country. It has also launched SLInG, a spot LNG index on its stock exchange, which may result in the development of products such as financial swaps for hedging purposes and eventually lead to the creation of a physical delivery mechanism in Asia.
Singapore is also planning an LNG bunkering station to complement its existing position as a hub that sells marine fuel oil. With Asean set to emerge as a major LNG importer, there are great opportunities for NOCs in the regasification business.
As new LNG liquefaction capacity of over 100m mt/y comes online over the next five years, global capacity will increase by around 40%. Across Asia, many consignments meant for Japan, Korea and China markets are likely to be sold in the spot market. Lower demand from major consumers is likely to keep spot prices low. This spells good news for Asean customers, especially those who have not contracted for much of their required LNG volumes.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
Sanjeev Gupta, Asia-Pacific Oil & Gas Leader, and Jaishankar Krishnamurthy, Analyst – Oil & Gas; EY, Singapore