Asian LNG Demand Powering Development in Russia, Middle East
Abstract: Rapidly growing natural gas demand, particularly in China and India, is driving multi-billion-dollar investments in LNG infrastructure in Russia, Australia, and the Middle East.
Analysis: When a topic is mentioned by the wizard of Washington, otherwise known as Alan Greenspan, you know it's hot.
The chairman of the Federal Reserve Board, whose comments have the magic to move currency and stock markets, noted earlier this week high natural gas prices are a big threat to the health of the U.S. economy.
With output from producing basins in Canada and the U.S. declining, there is little hope of relief in the short term because the country has limited access to abundant global supplies of liquefied natural gas (LNG), Greenspan told a congressional committee.
LNG supply in the U.S. has received a lot of attention in recent months, particularly as the financial problems of Enron, El Paso, Dynegy, and AES have delayed or cancelled ambitious projects to increase LNG import capacity by up to 1.6 trillion cubic feet (tcf) annually.
But the dynamics of the commodity in Russia, Asia, and the Middle East deserve more attention, particularly as they are driving huge investments and reshaping part of the global energy industry.
First, a very quick review. LNG refers to natural gas cooled to below -161 degrees Celsius (-257.8 degrees Fahrenheit), where it liquefies and can be stored in insulated tanks. Carried aboard specially built tankers, LNG usually becomes competitive with pipelines longer than 2,000 kilometres (1,200 miles). A rough rule-of-thumb is that reserves of 10 tcf are needed to backstop multibillion-dollar investments in production, liquefaction, and transportation assets.
Global trade in LNG was estimated at 105 million metric tons in 2001, accounting for approximately 6 percent of world gas production. The biggest buyers are Japan and South Korea, with the former taking more than half of all LNG cargoes. On the supply side, Indonesia, Malaysia, and Australia are among the biggest players.
The best example of the dynamics affecting the LNG market comes from Russia's remote and barren Sakhalin Island.
A consortium led by Royal Dutch/Shell expects to fork out $9 billion on its Sakhalin project, which contains Russia's first plant for liquefying natural gas for exports.
Shell's proposal, called Sakhalin-2, is eventually predicted to supply 15 percent of Tokyo's gas demand, which helps explain why Japanese companies are participating in the project.
Besides problems with nuclear reactors in Tokyo (see the May 9 edition of Oil & Gas Advisory) that could lead to blackouts this summer, Japan wants to diversify its supply sources, shorten transportation routes, and increase price competition.
But producers also have their eyes on potentially huge developing LNG markets in India and China. The Energy Information Administration's outlook for world energy demand to 2025 predicts natural gas demand in China will rise by 7.9 percent annually over the next two-plus decades. The comparative figure for India is 6.1 percent, while Japan's natural gas use is expected to rise only 1 percent annually over the forecast period. (North America's appetite for gas is expected to increase 2.2 percent annually over the period.)
Growing populations, a rising standard of living, additional gas-fired electricity generation, and environmental pressures are some reasons behind the surge in gas use in the emerging economic superpowers.
China, for example, is spending $12 billion to clean up the foul, particulate-laden air of Beijing by switching to gas from coal in time to host the Olympics in 2008.
A couple of recent deals show how serious the Chinese government is about moving away from the dirtiest fossil fuel. State-controlled China National Offshore Oil Co. (CNOOC) signed a 25-year agreement with Australia LNG Pty. for deliveries of 3 million metric tons of LNG starting in 2005, with the amount rising to 5 million in 2008. CNOOC also agreed to take 2.6 million metric tons per year of LNG from Indonesia's Tangguh field, beginning in 2007.
A study, expected to be concluded next month, is examining the possibility of Russia exporting gas to its former communist ally. The plans include the option to build an LNG plant at Shenzhen.
India is moving to deregulate its power industry in hopes of stimulating investment in the sector. The government's oil and gas ministry has recommended incentives until 2010 to encourage the building of LNG plants. It also suggested leaving the pricing of LNG and regasified LNG to the market.
The incentive program recognizes the likelihood that Iran, Oman, or other Middle East producers would send gas via pipelines through Pakistan and Bangladesh--two countries with very troubled relationships with India--is about the same as the Toronto Blue Jays winning this year's World Series.
India's first LNG regasification terminal, a 5-million metric-ton-per-year facility at Dahej, is expected to be operational by the end of this year.
The discovery of a huge gas field, estimated at more than 10 tcf, off the coast of India could reduce its demand for LNG. Even if India's market turns out to be smaller than anticipated, higher LNG consumption in China and other parts of Asia is attracting the interest of many countries besides Russia.
Qatar hopes to triple LNG capacity to 45 million metric tons per year by 2010. Iran, which co-owns with Qatar the world's largest gas field, called South Pars, is seeking bids for phases 11 and 12 of the field. Iran's plans for South Pars include developing an 8-million-metric-ton-per-year LNG plant at Assaluyeh on the Persian Gulf.
Australia expects to expand with a fourth train at its Northwest Shelf Project, adding 4.2 million metric tons annually of new capacity by 2004. Existing output at the project, located off the coast of western Australia, is 8 million metric tons per year.
Turkmenistan, Uzbekistan, and Kazakhstan--central Asian countries with combined reserves of more than 200 tcf--are looking at a variety of options, including LNG, to develop their gas resources.
Some forecasts call for global LNG trade to double by 2010 and triple by 2015. While those predictions are no doubt overly optimistic, it's probably a safe bet that growth over the next decade will surpass the 55 percent increase recorded between 1995 and 2001.
Further development of the Asian LNG market should be a good thing for North American buyers and consumers. Increased global investment in LNG production infrastructure and tankers should multiply the options available to our utilities and independent power producers, reducing their dependence on domestic suppliers and relieving some price pressure. This doesn't mean consumers will see lower prices in the future, just that their heating and lighting bills won't continue to skyrocket.