Global gas trade is expected to explode – and most of the new supplies will go to Asia. Europe will lose control of markets and pricing and will need to compete at higher Asian prices. That’s the main message energy reporter Rudolf ten Hoedt took away from the Gastech LNG conference in Korea in March where he spoke with leading LNG traders, including market leaders Shell, Qatargas and Tokyo Gas. “Europe doesn’t realise what is coming”, they told him. In the larger scheme of gas things, the Ukraine crisis is only a blip.
The Ukraine crisis has brought Europe’s dependence on Russian gas supplies back into the spotlight. The first reflex of excited EU politicians has been to look across the Atlantic to tap into the US shale revolution. LNG exports from North America could pull Europe out of the Russian shadow, they said. President Obama would open the floodgates and send LNG carriers, with or without a Free Trade Agreement, to the EU.
Unfortunately, this EU emergency strategy fails to take into account market realities. Obama probably knew this very well when he warned Brussels that American LNG supplies are not the panacea for Europe’s energy problem with Russia. Europe will have to face an ever fiercer competition with experienced and well-connected Asian buyers over LNG supplies. If it wants to replace Russian piped deliveries with LNG, it will have to pay a premium: “the Asian premium”.
Gas business will double
Over the next two decades, 85% of the growth in energy consumption will come from the Indo-Pacific region. China alone will account for 40% of global growth in energy consumption until 2025. Domestic production in the Asian region cannot meet demand and imports from elsewhere will skyrocket.
Gas will play a major role in this shift. According to Shell, one of the world’s largest LNG producers and traders, global gas demand is set to explode, growing from 220 mtpa (million tonnes per annum) in 2010 to 370 mtpa in 2020, with Asia of course as key-growth area. The company says gas will become the backbone of the global energy infrastructure, replacing oil as the biggest resource by 2030. “as a result of growing demand in China, South-East Asia, as well as the Middle East and The gas business will double in the next 10 years Latin America”, says Roger Bounds, Global Head of LNG at Shell Integrated Gas.
Shell has followed the gas pivot to Asia. In 2013, it moved its Integrated Gas headquarters from The Hague in the Netherlands to Singapore.
Shell has a big stake in gas. It is one of the growth engines of the company. Shell currently controls 10% of global LNG production. Since the acquisition last year of Repsol’s LNG business, the company has 26 mtpa of equity LNG capacity on-stream and another 17.7 mtpa under construction. Apart from this “equity gas”, Shell also traded nine million tonnes of additional LNG, delivering all in all 35 million tonnes to world markets in 2013 with Shell-managed LNG carriers.
“The industry will grow by 5% per annum and we want to keep our share”, Bounds tells Energy Post at the Gastech LNG conference that took place at the end of March in Korea. To do so, Shell has followed the gas pivot to Asia. In 2013, it moved its Integrated Gas headquarters from The Hague in the Netherlands to Singapore as “recognition” that, as Bounds puts it, “the Asian Pacific basin is the source of considerable supply and is a corridor where Shell expects to see increased LNG consumption”.
“Prices are not too high”
A big part of global LNG is absorbed by Asia. Japan, Taiwan, China and Korea currently import 70% of global supplies and their demand is on the rise. Japan is the biggest LNG importer worldwide and Kogas from South Korea the biggest single LNG importer globally. Shell supplies Asia from a wide range of sources: from its joint ventures in Brunei where it opened the first LNG plant in the Western Pacific back in 1973, from Qatar, and from Russia’s first and only LNG project, Sakhalin II, which meets almost 10% of Japanese demand and in which Shell participates with Gazprom and Japanese trading houses Mitsui and Mitsubishi. In addition, Shell has major innovative gas projects under construction in Australia, all of which are destined to supply Asian markets, often in partnerships with Asian buyers.
“If you take into account the long-term costs of other fuel choices, then you have to conclude that economically and socially, gas is clearly competitive”
Other oil companies are also undertaking many new projects in Australia, East Africa and of course the US. Russia too is racing to unlock more Siberian gas reserves, bringing other Russian companies, like Rosneft and Novatek, into the LNG export game to get access to Asian markets.
So what will be the consequences for gas prices? Some observers believe that with the new capacity coming online after 2017 and demand from LNG emperor Japan expected to remain stable if not decline, the elevated LNG prices in Asia will come down. On Asian spot markets, prices can be as high as $19/mmbtu, a premium of $8 compared to what Europe is used to paying for its gas.
Suppliers, however, insist that the market is tight and deny that prices will or should come down. They point at the strong demand increase that is expected. “LNG prices in Asia are not too high”, says Bounds of Shell. “Prices for short term deliveries are no indication for long-term commitments. If you take into account the long-term costs of other fuel choices, then you have to conclude that economically and socially, gas is clearly competitive. What the industry has to do is to deliver more LNG into this market on the back of strong relationships.”
According to Bounds, “We need more LNG from Australia and the US, we need more LNG from Russia, the Middle East and East Africa. We estimate that the industry needs it all to meet the growing gas demand in China and South East Asia. All these new supplies, the industry will absorb it all.”
Largest supplier of LNG
Asian LNG buyers are of course anticipating a further surge in demand and the growing import dependence of their region. Of the few US LNG shale projects that will come online within now and a couple of years, a considerable part of equity production has been earmarked for Asian destinations already. “Major Asian LNG buyers on average have approximately 20% of their LNG portfolio based on North American supply in their 2020-2025 window”, says Japanese LNG veteran Shigeru Muraki of Tokyo Gas.
At Gastech LNG, industry representatives pointed out that president Obama cannot overrule the markets by suggesting US LNG exports will come to the aid of Europe. Asian companies and Western oil companies as well who want to benefit from the windfall in Asia will not change plans and direct gas carriers to Europe just like that. Shale LNG from the US will not naturally turn eastwards in the future and cross the Atlantic. “It will be part of the global export mix. Some of it will turn up in Europe”, Bounds says cautiously.
“Only three years ago, South-East Asia had never imported LNG”
It remains to be seen what Shell can come up with in the US where it was late to join the shale frenzy and is currently wrestling with costs. But if Shell and others send LNG supplies to Europe, it will only happen if Europe wants to pay higher prices than it is used to. “Europe will have to compete for LNG with higher valued markets in Asia”, says Alaa Abujbara, COO Commercial &Shipping of Qatargas, Europe’s biggest single supplier of LNG.
Qatargas was established in 1984. Partnering from the very beginning with Japanese trading houses Marubeni and Mitsui, as well as with Chubo Electric and other Japanese utilities, it has become a main integrated gas company, one of the first with a fully integrated LNG value chain with offshore operations, 4 LNG joint ventures with major oil companies including Total and Shell, 4 LNG mega-trains, three smaller trains and condensate refineries of its own. The company currently produces 42 mtpa of LNG and claims to be the largest supplier of LNG worldwide, with a purposely built fleet of 10 LNG tankers and another 32 large size Q-Max and Q-Flex LNG membrane carriers. In the last 4 years, the gas portfolio of Qatargas has changed dramatically, reflecting the same fast and fundamental shift in the global gas markets that has driven Shell Integrated Gas deeper into Asia.
In 2010, Qatargas’ portfolio was still evenly divided between the main gas consuming regions. Of contracted supply, 25% was earmarked for the Americas, 35% for Europe and 40% for Asia. “Outside of Qatar, we only had an office in Japan since 1996”, says Abujbara. “In Bejing we opened an office in 2009 when we delivered our first LNG delivery to China in October that year.”
Since then, developments have accelerated. As a result of growing gas demand in China and post-Fukushima Japan in the first place, the demand for LNG in the Asia Pacific almost doubled from 2005 reaching 175 mtpa in 2013. “By 2013 5% of our deliveries went to the Americas, 25% to Europe and 70% to Asia”, according to Abujbara.
Qatargas has left an ever deeper footprint in Asia. In 2013, it was China’s largest LNG supplier and Japan’s second largest. Qatargas believes Asian demand for LNG will be more than 320 mtpa by 2025. “China and India in particular will account for a large part of this increase. The demand in these two nations alone will grow from 30 mtpa in 2013 to more than 100 mtpa in 2025. LNG demand in South-East Asia has greatly changed as well since 2011. Only three years ago, South-East Asia had never imported LNG. Now Thailand, Indonesia, Singapore and Malacca are importing LNG. We opened an office in Bangkok at the end of 2013 to service growing South-East Asian markets.”
Joining the club
By the end of the decade, Vietnam and the Philippines are expected to join the club of LNG importing countries as well, while Myanmar is expected to take a decision very soon.
So where does that leave Europe, Energy Post asked Abujbara. “In our projections European gas demand is going to pick up very soon. Europe will need an additional 150 mtpa of gas over the next decade and it has to start to think about where this needs to come from. We believe LNG supplies will reach 100 mtpa by 2025. Somebody needs to meet this demand. In terms of LNG it will be very challenging to bring this on stream. At this moment, the liquidity in the European market is there. Companies are reloading cargoes out of Europe to (higher valued markets in) Asia, making money out of it. This business is going to continue. It is going to take the Europeans a lot of work trying to control that gas flow out of Europe.”
“The gas business will double in the next 10 years”
Abujbara reassuringly adds that Qatargas is still the biggest single supplier of LNG to Europe and will remain a strong supplier in the future. But he ominously notes that the pricing of its gas is bound to look very different in the future. “Our prices will not retain NBP indexation anymore [the National Balancing Point in the UK sets the main European spot market price, editor]. Europe doesn’t realize what is coming. It has to compete with Asia. When demand in Europe will surge again, European consumers will need to compete for this gas with higher Asian prices.”
This scenario may still take a couple of years to materialize. Respected energy consultant Wood Mackenzie, however, warns that Europe may have to face competition with Asia very soon. According to Wood Mackenzie, a disruption of Russian gas supplies for Europe through Ukraine could push spot prices in some Southern European markets higher. A two-month disruption may force the Southern European countries of Turkey and Greece to require additional LNG of some 2 million tonnes. Noel Tomnay, Head of Global Gas Research at Wood Mackenzie said in Seoul at the Gastech LNG conference that if the disruption is more severe, for example of six-month duration over the 2014/2015 winter, he expects more South European countries, including Spain, to call on extra LNG. “Southern European markets would then need to compete with Asia and Latin America for additional LNG cargoes”, Tomnay said. “This would push spot prices in some Southern European markets higher – to levels equivalent to Asia.”
In other words, the Ukraine crisis may be the decisive factor that will push Europe into the orbit of the global gas market. But this is bound to happen anyway.
Tokyo-based energy journalist Rudolf ten Hoedt will regularly report on the stormy developments in the Asian energy market for Energy Post. You will find his contributions in a special Asia section that we will soon introduce on our website.