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Home Home Briefing Room Permitting The Project About Us Government Partners Contact Us ‘What ifs’ cloud Asia LNG demand forecasts


In a game of "Jeopardy," the answers would include government subsidies of energy costs, Japan's nuclear power plants, coal, China's shale gas, Russian gas, and liquefied natural gas exports from North America.

The question is: What factors will affect demand and price for LNG cargoes to Asia in the years ahead.

As those unknowns muddle everyone's forecasts of LNG demand, it's also unclear how two conflicting urges will balance out: Buyers want lower prices, while project developers want prices high enough to cover their billions of dollars in capital and operating costs.

"It's indisputable" that energy prices must reflect the costs of exploration, production and transportation, an oil and gas company executive said at the Pacific Energy Summit April 2-4 in Vancouver, B.C. Energy subsidies in some key LNG markets may keep political peace at home, but the cost to government treasuries is significant. Subsidies also can put gas supply at risk:

  • Imports will be dampened if LNG is too expensive. Utilities that are unable to pass on their full natural gas costs to consumers will "stick with coal" even if it is more polluting, said an international financial adviser who works with energy companies.
  • Domestic production will be dampened if governments don't allow prices high enough to let producers cover costs and earn a profit from developing gas fields, said a director of an Asian research institute.

The conference was sponsored by the National Bureau of Asian Research, based in Seattle and Washington, D.C., the Asia Pacific Foundation of Canada, and the Asian Development Bank, with its main office in the Philippines.

Government and private-industry officials gathered from China, Japan, South Korea, Hong Kong, Singapore, the Philippines, Papua New Guinea, Bangladesh, Vietnam, Indonesia, the United States and Canada. The conference operated under Chatham House Rule, an 86-year-old English tradition that provides "anonymity to speakers to encourage openness and the sharing of information." It's OK to repeat what is said at the conference, but no names.

A chart showing that Asian lng imports increased 2011 2012

Source: International Group of Liquefied Natural Gas Importers

(Click to enlarge.)


Governments that limit the domestic sales price of natural gas for the benefit of consumers force LNG importers to lose money on some cargoes.

For those countries that subsidize energy, a lot of the aid from government treasuries goes to middle- and upper-income consumers — not the people who need it most.

"Energy security does affect political stability," a Southeast Asia diplomat said. A fellow diplomat concurred, adding countries struggle with the expensive dilemma. Among countries represented at the conference, the government subsidizes energy or sets prices in China, India, the Philippines and Indonesia. The unintended but not surprising economic consequence is constrained domestic production.

China is experimenting with loosening natural gas price controls in two provinces and may expand the move into more provinces, hoping the higher prices will be an incentive for companies to boost domestic gas production, an Asian diplomat said. But higher prices could lower demand for the fuel if consumers have to pay the real costs.

Indonesia faces a particularly frustrating problem in that it exports much of its production as LNG. Growing local demand has put a squeeze on supplies as the country honors its export contracts, while price controls at home deter companies from producing more gas for domestic needs.

South Korea has its own problem, an Asia economist explained. Utilities need the government to allow higher prices for electricity to justify investments by power generators to build plants to meet peak load demand.


A Japanese government commission is expected to issue new safety rules this summer for nuclear power plant operations. The rules likely will be so stringent, a Japanese economist said, that some of the nation's 50 nuclear plants will need costly retrofits before they can reopen.

It will take until the end of the year before any plants are able to restart, even those that don't require retrofits, he said. Bringing nuclear plants back online will reduce Japan's demand for imported LNG. "How much, at this moment, I have no idea," the economist said. Japan's LNG imports have climbed 25 percent in the two years since the Fukushima nuclear plant disaster.

Japan's new national government is more supportive of nuclear power, though local governments — which are less supportive — will have a significant role in any decisions to restart individual plants.

"Restarts will not happen in one day," said a Japanese government official, adding, "There is a clear change in direction."

A chart showing the energy mix in Japan before and after Fukushima.

Source: Compiled by Japan’s Ministry of Economy, Trade and Industry

(Click to enlarge.)


Coal remains a prevalent base-load fuel for power generation in Asia, said an international development official. The affordable fuel is a viable option for nations that need to reduce their subsidies of electrical power, said a Southeast Asia government official.

An audience member, however, challenged several speakers when he said "the elephant in the room" is the reluctance of governments to address the total cost of coal-fired power, including the environmental costs of pollution, rather than looking only at the bill for fuel deliveries. A carbon tax would tell the whole truth of coal, he said. Several speakers concurred, but few predicted a majority of the worlds' nations would impose meaningful carbon taxes anytime soon.

Japan, which has relied heavily on burning more oil and LNG the past two years since shutting down its nuclear power plants, also is increasing its use of coal at times to help restrain imports of more expensive oil and natural gas.

Countries can burn only what they can afford, several speakers said.

It's especially hard to encourage cleaner fuels and costlier alternative energy when governments continue to subsidize or impose price controls on fossil fuels, especially fuel oil, gasoline, diesel and natural gas.


China's estimated technically recoverable shale gas resources total 1,275 trillion cubic feet, according to the U.S. Energy Information Administration. China's government policy is to get it out of the ground and into the economy, replacing dirty coal and costly imported LNG. Easier said than done.

Chinese oil and gas companies lack the experience required for shale gas production, though they are buying that expertise while also attracting multinational companies to help explore for the gas.

But much of the shale gas is spread out in remote basins, far from market. Much is in arid regions of the nation, far from the massive amounts of water needed for hydraulic fracking to crack the rock and release the gas. Even if drillers find a water source, handling the water as it comes back up the well "is a critical challenge," an oil company executive said.

If China can get water to where it is needed, if it can solve the problem of wastewater disposal, if it can learn how to produce shale gas at a price the market can afford, conference participants agreed the nation would need less imported LNG than expected.

Though fracking is still new to the Chinese, the practice has attracted a lot of controversy in the United States, where shale gas production has put the country in position to export surplus natural gas. An audience member asked: Will that growth continue and will the environmental pushback against fracking expand to other countries?

"Until there is a scale of disaster" similar to BP's deep-water Gulf of Mexico rig explosion three years ago, shale gas production and fracking will continue, a speaker answered.


As Japan looks around the world for new, less expensive LNG supplies, it is waiting to see if the Russian government allows other producers to break Gazprom's monopoly on gas exports, expanding supply options, a Japanese official said.

Meanwhile, his country is "working very hard" on Gazprom's proposed LNG export terminal at Vladivostok, just across the Sea of Japan on Russia's mainland. The government signed an accord with Gazprom last year to move forward in planning the multibillion-dollar terminal. Gazprom is eager to grab a larger piece of the Asia LNG market, and Japan is just as eager to talk with any new potential suppliers.

But the deal is not done, the Japanese official said. It's about money, he said, describing the negotiating stage with Gazprom as "show me your price."

China has been in talks with Russia for years, trying to strike a deal for pipeline gas deliveries. Gazprom's latest proposal involves a pipeline from Eastern Siberia gas fields to serve the Vladivostok LNG plant and to supply China with pipeline gas. Just like Japan, price is the sticking point with China. Gazprom wants top dollar. Asian buyers don't.

A Japanese banking official said he is suspicious the Russia-Japan-China pipeline and LNG project will get built. Cost estimates for the gas field development, transportation and liquefaction plant total $50 billion, or more.


Every speaker who addressed the potential for North American LNG exports to Asia said it will happen. The unknowns, they agreed, are when, how much and at what price.

LNG projects proposed for northeastern British Columbia shale gas plays will need oil-linked prices for their cargoes to cover the high costs of developing remote fields and building a pipeline through two mountain ranges to the Pacific Coast, an international energy analyst said.

The distance to tidewater is a disadvantage for Canadian projects competing for buyers with proposed U.S. Gulf Coast LNG projects, a Japanese bank official said. As is the fact that the U.S. export terminals would be lower-cost additions to existing import operations, whereas the Canadian projects need to build their own docks, jetties and storage tanks.

It's like a hockey game, with the two countries battling for position at center ice. Some pushing and shoving, but no one is throwing off their gloves for a fight.

Score one for the Canadians, however, with stronger government support for gas exports than in the United States, said several speakers. "The U.S. has an energy identity crisis," a global adviser said. After years of fear of oil and gas shortages, "it is going to take time" for the country to accept a new role as a potential exporter.

And score another advantage for Canada in that tanker charges from the B.C. coast could be as much as $3 per million Btu cheaper than the long haul from the U.S. Gulf Coast, the Japanese bank official said.

And though today's gas prices look attractive, buyers are aware of the price risk of buying North American gas, which has seen periods of price spikes just as painful to customers as LNG linked to oil prices at $120 a barrel.

This month's North America prices — around $4 per million Btu in early April — are not sustainable, several speakers said. Producers need higher prices to cover exploration, development and production costs, a Japanese banker said. Long term, he said, prices could settle in the $6 to $7 range, which would make the gas $15 or $16 in Japan after liquefaction and transportation charges.


"We think global LNG prices will be coming down," said a bank analyst. The introduction of North American LNG into the market, coupled with lower oil prices, will push down natural gas prices, he said.

Slower economic growth in China, plus Saudi Arabia's plan to use natural gas instead of oil for power generation, will put more oil on the market and soften prices, the analyst said. Increased U.S. oil production also will contribute to lower prices. And as oil prices fall, so will oil-linked LNG prices.

As for new LNG supply, no one expects every proposed export terminal to start up, but enough will go online in the years ahead that supply growth will loosen up markets, putting pressure on prices, a Southeast Asia economist said. In that buyers' market, "That would be the time when pricing formulas start changing."

And as European customers continue to pressure Gazprom to lower its gas prices, it's "just a matter of time" before the same push wins out for Asian buyers, he said. The new world order could be a blended price, a mix of oil-linked pricing and North American or other market hub pricing, he said.

At least two economists seconded the notion of a blended price, a hybrid system they called it.

And though one global energy economist said he is skeptical of how much North American LNG would affect global prices, he believes Asian buyers "will look to add U.S. LNG into their portfolios as a price-diversification and supply-security strategy."


Fiscal certainty means "we need to have some sense what the deal's going to be," and that a country will honor its commitments, said an oil company executive.

A North American financial adviser termed it political risk. He listed it as one of the top issues for companies deciding on oil and gas investments. His list of "what it takes to acquire capital" included sufficient proven resource behind the project. Uncertain reserves worry investors, he said. Experienced and credible project participants are equally important. "Investors are very focused on that."

Among the risks that investors look to avoid, he said, are stakeholder problems, including landowners and aboriginal peoples. Cost overruns are always a worry on big projects.

And economics. "Too often people have rosy looks for what they can get for their products in the marketplace." The perception of windfall profits can kill a project's economics, he said.

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