Post on 08-Oct-2020
APERC Workshop at EWG52
Moscow, Russia, 18 October, 2016
3-2. LNG in the Asia-PacificFavoring trade and rational market development
Kirsten SmithResearcher, APERC
Report Highlights
3
LNG in Asia-Pacific: Favoring trade and rational market development
Report Highlights
Popular pricing mechanisms in the Asia-Pacific disadvantage natural gas and LNG
The region has been shocked by high natural gas prices that have fueled energy security concerns
Oil-linked pricing has created excessive volatility and has driven market imbalances that distort the normal investment cycle
Long-term contracts have been used to reduce investment uncertainty at the expensive of market flexibility
Shocks in the oil market are unrelated to natural gas market balances
4
LNG in Asia-Pacific: Favoring trade and rational market development
Report Highlights
Major challenges exist in expanding the use of natural gas and LNG
An ambiguous role in the transition to a low-carbon economy
Declining domestic production in the Asia-Pacific increases energy security concerns for importers
Lack of convergence in opposing stakeholders’ expectations without an appropriate pricing mechanism to align interests
5
LNG in Asia-Pacific: Favoring trade and rational market development
Current market conditions present an opportunity to direct structural change in order to encourage a more liquid and rational LNG market over future business cycles
Global demand will be driven by Asian economies, but domestic supply will fall short
Negotiating power has shifted away from one extreme with the emergence of a buyers market
Report Highlights
0
100
200
300
400
500
600Planned projects
Divertable supplies from Europe
New projects
Existing projects
High demand
Low demand
MT
2010 2015 2020 2025 2030
LNG trade balance in APEC
LNG markets
7
Major worldwide LNG trade flows, 2014
Major LNG trade flows have historically kept the international market
divided on a regional basis
Natural gas has competed in separate isolated markets
8
Worldwide LNG imports by region, 2000-2014
APEC has 14 out of 20 import terminals and 27 out of 28 export terminals
expected to begin construction before 2019
Growth in LNG demand has come from Asia
North American LNG Export Terminals Approved
0
50
100
150
200
250
300
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
Middle East
Americas
Europe
Asia
MT
9
Natural gas import prices and spot LNG prices for northeast Asia, 2001-2015
When global oil prices increased, regional natural gas prices diverged
because of differences in pricing mechanisms
The Asian Premium has driven energy security concerns
0
5
10
15
20
25
20
15
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
Japan
JKM
UK
USA
$/MMBtu
2016
Outlook
11
Natural gas demand and supply outlook in APEC, 2013 and 2040 (Bcm)
Natural gas is expected to be the fastest growing fossil fuel
2040
156
439
678
188
17638
146
678
492
1068
211
338
65318
China
Russia
United States
Other north-east Asia
Other Americas
Oceania
South-East Asia
2013
Demand
385
699
1109
4
419
125168
2040
2013
112
626
630
4
204
63190
Supply
Strong supply growth in
the US, China and Other Americas
Strong demand growth in the US, China and SE Asia
Note: Oceania (Australia, New Zealand and PNG), Other Americas (Canada, Chile, Mexico and Peru), Other northeast Asia (Hong Kong,
Japan, Korea and Chinese Taipei), South-East Asia (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand and Viet Nam)
12
APEC natural gas net exports by region, 2013 and 2040
Production in Asia is not expected to meet forecast demand growth,
which will mean increasing import dependency
Asia will continue to rely on natural gas imports
-400
-300
-200
-100
0
100
200
300
China Russia United States Other north-east
Asia
Other Americas Oceania South-East Asia
2013
2040
Bcm
Net importer
Note: Oceania (Australia, New Zealand and PNG), Other Americas (Canada, Chile, Mexico and Peru), Other northeast Asia (Hong Kong,
Japan, Korea and Chinese Taipei), South-East Asia (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand and Viet Nam)
Net exporter
Pricing and contracts
14
Oil Price Escalation (OPE)
Price is linked, usually through a base price and an indexation clause, to competing fuels, typically crude oil, gas oil and/or fuel oil.
Originated in Europe in the 1960s when NAM (a joint venture between ExxonMobil and Shell) and the Dutch government introduced it with the intention of giving natural gas a price advantage to incentivize its use over other oil-based fuels.
Gas-on-Gas Competition (GOG)
The price is determined by the interplay of supply and demand and is traded over a variety of different periods.
Trading takes place at physical or virtual hubs and it is likely to occur in developed futures markets.
Increasingly seen as the competitive market ideal.
Most common market-based mechanisms for price setting
15
GOG = Gas-on-gas competition, OPE = oil price escalation
Worldwide natural gas imports by market price mechanism
Gas on gas competition dominates in North America
and has increased in popularity as utilities have been unbundled in Europe
Most common market-based mechanisms for price setting
0
50
100
150
200
250
300
350
400
North America Europe Asia Asia-Pacific Latin America Former Soviet
Union
Africa Middle East
GOG
OPE
Bcm
APEC seeks to increase GOG competition to encourage market pricing linked to gas fundamentals
rather than oil prices
16
LNG spot and short-term deals, 2000-2014
The oversupplied market has led to increased bargaining power for buyers
and more flexible contracting arrangements
Contract structures are becoming more flexible
Old Model• Long-term (~20 years)• Destination restrictions• Take-or-pay• FOB shipping responsibility
New Model(s)• Spot, short-term or long-term• Tolling structures• Resale flexibility
Typical contract specifications
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
50
60
70
80
2000 2002 2004 2006 2008 2010 2012 2014
Middle EastLatin AmericaNorth AmericaEuropeOther AsiaChinaIndiaTaiwanKoreaJapanShare of spot and short-term deals
MT Share of spot and short-term deals
Policy recommendations
18
Define the role of natural gas in energy and climate policies
Transitioning toward a low carbon economy
Policy recommendations
0
100
200
300
400
1990 2000 2010 2020 2030 2040
China
Japan
Korea
Chinese Taipei
Thailand
Malaysia
Viet Nam
Mtoe Projected net coal imports for selected APEC economies
The extensive use of coal in Asia offers remarkable potential to expand the primary demand of natural gas
in APEC in the form of LNG
Enforce fiscal and investment frameworks that facilitate gas upstream projects
Promote financing alternatives for LNG projects
19
Acknowledge the critical role of LNG infrastructure for energy security
Policy recommendations
Support the development of gas price hubs
Explore alternative LNG business models
Advance new LNG contract features
Natural gas import sources in APEC
0.0
0.2
0.4
0.6
0.8
1.0
0%
20%
40%
60%
80%
100%
2000 2005 2010 2013
Others
Turkmenistan
Australia
Qatar
USA
Indonesia
Malaysia
Canada
Share of Intra-APEC imports
Gas import diversity (RHS)
Bett
er
Wors
e
20
Use collective power to encourage more balanced interactions and discussions
Policy recommendations
Engage stakeholders in LNG projects
Foster regional cooperative activities
APEC is an excellent forum to discuss mechanisms that facilitate an
accelerated LNG trade that leverages the dialogue and collaboration of producers and buyers across member economies.
http://aperc.ieej.or.jp/
Thank you for your kind attention