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“Natural Gas and the Asia-Pacific Region”

By Paul Sullivan,
Georgetown University

The shale gas revolution that has dropped prices of natural gas from about $13 per MMBTU (million British Thermal Units or about a million wooden kitchen matches burned all the way down) to about $3 per MMBTU has not taken hold in Asia just yet. It is starting up in Canada, especially in the natural gas fields in its northwest. The Canadians want to develop these shale gas and conventional gas fields in order to supply their own markets, the US by pipeline to some areas, and especially to export LNG (liquefied natural gas) by tanker to Asian markets.
The biggest source for shale gas from and for North America looks to be likely the United States. Mexico has significant shale gas resources, but it looks right now that it will not be able to export much due to its internal demand that is expected. Mexico, however, especially in the Baja California area, could be aplace that could export LNG from the United States given that the western states are wary of building LNG export facilities. Three LNG export facilities have been proposed for the state of Oregon. None have been proposed for California. Most of the LNG export facilities for the US have been proposed along the Gulf of Mexico Coast in Texas and Louisiana. The routes to Asia that this LNG might take would bring them through the Panama Canal. Other LNG export facilities have been proposed along the US East Coast, which is not good positioning to export to Asia. This would add significant transport costs over the west coast facilities. Much of this LNG would likely go to the EU, which has far more expensive gas prices than the U.S. has.
Asian LNG import prices are some of the highest in the world at the port. For Japan sometimes we are talking about $15 or $16 per MMBTU for China it could be $12 or $15 MMBTU at the port depending on the type of contract signed and whether the gas is indexed to oil or natural gas liquids or is a long term contract that set the prices some time ago. What happens to the prices after the LNG is gasified and sent into the pipelines in China is another story. China had internal prices of natural gas that are far cheaper than the international prices of imports. It subsidizes the costs of gas. China wants to keep the prices of gas low in order to spur economic development and to not get people to upset with energy prices.
China’s use of natural gas is likely going to increase quite a bit for economic as well as energy security and environmental reasons. Some expect that by far the greatest increase in natural gas demand in the region will be from China in the coming decades. In recent years China has gotten a lot of its imported natural gas via LNG from Australia, Indonesia, Qatar, and Malaysia. However, it also got some LNG from Yemen, Nigeria, Trinidad in South America, Egypt and a tiny bit from Russia. This could all change quite drastically if the plans for multiple sources of natural gas from Russia via pipeline from both western and Easter Siberia work out. The western route would bring in gas from the Altai network and it would cur not far from the Mongolian border. The eastern route would bring gas via pipelines to the northeast of China from the Russian gas fields in their east and northeast. LNG from Russia could also be coming to China via tankers from Sakhalin Island or from a facility to be built in Vladivostok in Russia’s very Far East.
Australia is investing huge sums in its conventional and unconventional natural gas reserves and infrastructure. It could be an even more important supplier of LNG to China, Japan, South Korea and Taiwan in the future. It will also expand its markets in North America and beyond. Australia might just go past Qatar as the largest LNG exporter in the world in the future. Indonesia might be facing huge increases in its own internal gas demand that could make it a net importer of gas in the near future. Malaysia is also facing increased internal demands and also is developing with others a regional gas pipeline system that may take more over time and reduce its net LNG exports.
South Korea gets its LNG mostly from Qatar, Indonesia, Oman, and Malaysia. Yemen has been a source, but its politics and limited gas supplies may preclude this in the future. Russia is looking to set up more LNG exports to South Korea. It is also considering pipelines to South Korea alone and even one connecting South Korea to Russian gas fields via North Korea. That would be a very interesting political faulty line, not just a pipeline.
Taiwan, another heavy LNG importer gets most of its LNG from Qatar and Malaysia, with some from Nigeria and Indonesia. Taiwan could be a market for Canadian, US, Australian and other LNG exports. However, politics may get in the way of that.
The biggest importer of LNG in the world is Japan. It gets most of its LNG from Australia, Qatar, the UAE, Brunei, Indonesia and Malaysia. Since the horrific Fukushima incident its demand for LNG has increased, given that Japan has no internal sources of gas, and its prices have also increased. Depending on the politics of nuclear power in the future there could be an increasing market for even more gas for Japan. Canada, the US, and many other global sources of gas could take advantage of this.
There are many countries looking to increase their LNG outputs to the Asia-Pacific markets. These countries and their companies should be wary about certain issues. One is the potential for oversupply of LNG added to piped gas if there is an overreaction to the price differences across countries and regions. They should also be wary of dropping billions in investments, and that is what the pipelines and LNG facilities being mentioned would cost, without doing proper market analysis of what might be happening as they are investing and what might be happening as they are investing. Many Asia-Pacific contracts are long term and are indexed to oil to some degree. If as the Asia-Pacific markets grow these pricing mechanisms change then one might expect the delinking of gas prices from oil prices as has happened in the US as gas supplies rocket forward in the region independent of anything happening in the oil markets. Prices could be a lot lower than expected and could be a lot more variable than expected and companies and countries, both on the supply and demand sides need to consider these possibilities.
The International Energy Agency recently proposed that Singapore become a natural gas trading hub. This could work in business and economic terms something like the Henry Hub in the US. Markets could set their base prices to the Singapore Hub price and then either add on or subtract depending on what the circumstances might be. The more this hub and the rest of the Asia-Pacific markets head toward spot pricing and away from long term contracts the more difficult it may be to have some investments happen. The less locked in prices are the less locked in some investors might be to the billions needed to produce, liquefy, transport and regasify it.
China may also develop its massive shale gas reserves. This could be even more competition to those thinking of exporting LNG to China. Timing will be everything on this. China is having some difficulties reaching its shale gas production targets. This seems to be due to problems with who exactly owns the mineral rights, what the price of the shale gas produced will be in the market, some geological issues with some of the shale in China that make it more difficult and costly to get out, and also some problems with water supplies to the shale gas areas – including competition for water supplies with farmers and others. There is also a problem with the development of the proper infrastructure to get the shale gas out of the basins to where it is needed. China, however, has overcome many infrastructure problems in its past and this may be one of the easier of tis shale gas problems. Shale gas investments in China also have to consider seismic problems in some areas. These investments could also be shaken by the inflow of gas piped in from Russia, Central Asia, Burma, and more in the medium term. They could also be shaken if as the LNG markets in the Asia-Pacific develop LNG imports become far cheaper for China. China has massive coal bed methane reserves that it seems could develop more easily than its shale gas reserves. Many think its coal bed methane production will outpace its shale gas production for some time to come.
China may have the largest in place reserves of shale gas that we know now. The US could be number two. However, with any to do with minerals underground you really do not know until you know. There will be surprise reserves finds, much like what has been happening in Tanzania, Mozambique and even off the coast of Israel and Cyprus. Until the appraisal wells are dug and the gas is taken out you really don’t know what you are dealing with exactly. Some fields are surprises in both good and gas ways.
There are also two potential game changers looming for global and Asia-Pacific natural gas markets. One could be any breakthrough in better, safer and cheaper ways of extracting and transporting methane hydrates, frozen natural gas in the deep seas. This could really throw markets off and possibly drive the price of natural gas way down. Methane hydrates are a gigantic source of energy that could be greater than all of the oil, gas and coal in the world that we know of. However, this does not seem to be a near term threat to the markets. Another game changer could be the more than expected development of natural gas transport. Most of the demand of gas in the Asia-Pacific region is for electricity generation. If there are huge shocks to oil markets these could drive transport vehicle designs and production towards natural gas very quickly. The increased development of coal gasification in China, India, Mongolia and elsewhere could also disturb normal natural gas markets.
In the words of the famous American baseball man, Yogi Bera, “It ain’t over till it’s over”. (Please excuse the poor English, but he made sense even though what he said often seemed like nonsense.)
Natural gas markets in the Asia Pacific region are likely to be quite exciting as things develop in Canada, the US, Latin America, Africa, the Easter Mediterranean, the Arabian Gulf, and surely in Russia, Burma, East and Northeast Asia, Australia, Southeast Asia, and more. The natural gas industry is already a global industry. It is not fully there, but the drivers seem to be heading it in that direction. The more LNG facilities, tankers and more that are built, the more unconventional and conventional gas finds there are, and the more the market is driven towards delinked contracts and even spot markets the more we will see the region’s natural gas markets develop, change, and we will be surprised. That is one thing I can pretty much guarantee. The rest of it is a complex situation in motion with lots of free variables on the political, diplomatic, economic, military and other sides.
Just a few years ago the US was looking to increase the number of LNG importing facilities. Now there are many proposals to build LNG exporting facilities and to convert the LNG importing facilities to exporting facilities. And who would have thought that Israel would be a major gas producer or that Tanzania would have massive gas reserves off its coast even 6 years ago.
Yes. Things change.

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Posted by on Mar 12 2013. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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