Asia to soak up global LNG glut
Weak prices reflect a region awash in supplies. Rising demand will soak up the global surfeit, but not until the 2020s
Although Asia-Pacific is buying less liquefied natural gas at the moment, as big established users consume less, demand for the fuel should rebound with a vengeance early next decade as gas-fired power-generation capacity ramps up and new markets are opened.
Indeed, whatever today's doubts, the longer-term picture still looks rosy. Asia-Pacific could see a 50% increase in LNG demand between 2016 and 2035, according to data from consultancies
Wood Mackenzie and FACTS Global Energy.
Southeast Asian demand could surge by 80% over the same period while consumption growth in South Asia is set for a 70% increase. Much of this will be driven by strong uptake of imported LNG for power generation in Bangladesh, the Philippines, Vietnam and Indonesia; and, to a lesser extent, Malaysia, Pakistan, Thailand, Singapore, India and China.
By contrast, two of Asia-Pacific's largest gas buyers—Japan and South Korea—look set to stabilise their consumption in the coming two decades as economic growth in both countries slows. In Japan, nuclear power is set to re-establish its place in the country's energy mix. In China—the region's other large consumer—LNG imports are expected to rebound, albeit at a slower rate than in previous years as the country's once-steep economic growth trajectory eases off.
Supply-demand: short term
Up to 2023, Asian LNG demand isn't expected to soak up the global LNG supply glut. Rather than cut rates, high-priced LNG suppliers, such as those on Australia's east coast, are likely to reduce LNG offtake until the surplus dissipates, while US suppliers are likely to target Asia to exploit price differentials between the Atlantic and Pacific Basins.
Qatar, Asia's lowest cost supplier, is already responding to buyer needs and undercutting other sellers into the region.
RasGas, which has signed long-term, competitively priced gas-sales agreements with Pakistan, has also renegotiated existing LNG-sales deals with China National Petroleum Corporation and India's Petronet LNG in the past 18 months.
Japan is wrecking the long-held view that Asian buyers are willing to pay high, oil-indexed prices for LNG to safeguard security of supply. A test case is making its way through Japanese courts to challenge the destination clause in long-term LNG supply contracts. A decision is due in late-2017 and will have far-reaching ramifications for the liquidity of the nascent Asian LNG spot market and for exporters.
The availability of excess LNG volumes—even those assigned under long-term contracts—should put short-term pressure on both spot and contract prices while also kick-starting the region's spot trading markets. The increase in spot volumes being traded by independents such as
Vitol, Glencore and Trafigura in Asia-Pacific, as well as the interest being placed on establishing dedicated LNG trading exchanges in Singapore by GLX and others, indicates the regional growth potential for LNG trading.
Supply-demand: long-term Post-2023, LNG demand is set to exceed supply globally, particularly in Asia-Pacific, where gas use will see the most growth—leaving the potential for a price surge if today's glut deters developers from sanctioning new projects.
The main growth drivers up to 2023 will be the switch from coal to gas-fired power generation, declining indigenous gas production and, in some countries such as Indonesia, a lack of new discoveries coupled with rising gas use. In northeast Asia, growth in LNG demand up to 2023 will be led largely by China as it reduces coal-fired power capacity to meet emissions-reduction targets.
In south and southeast Asia, Thailand will initially drive LNG demand growth, followed by Indonesia and Malaysia further out. India and Thailand will both step up LNG imports to offset falling gas production, while Indonesia will mirror China in growing gas-fired power's share of total generation capacity. Indonesia's
Pertamina has estimated that LNG demand will rise by up to 5% annually as domestic gas supply due to ageing fields.
India, Vietnam, Bangladesh, Pakistan, Malaysia, Indonesia, Thailand and Singapore combined could import between 150bn cubic metres and 200bn cm a year of LNG by 2030 alone, compared with under 50bn cm/y at present. Of the 13 Asian nations forecast to import LNG in the coming decades only Japan will see a drop-off in demand between 2016 and 2035, of around 25%.
For smaller gas markets like Thailand, Singapore, Malaysia and Bangladesh, the deployment of floating regasification and storage units (FSRUs) is providing new entrants with access to LNG supply. In Asia-Pacific, the growth of FSRUs has been modest so far—deployed on a small scale in China, Indonesia and Pakistan, with India and the Philippines expected to commission further facilities soon—but is expected to pick up.
Just one note of caution. The big unknown for Asian gas demand is the impact that falling costs and the growth in uptake of renewable-power generation, electric vehicles and battery storage will have on LNG demand. While such evolving technologies are unlikely to entirely unseat consumption of seaborne gas, they could temper its scale and pace.
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