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Market picture for LNG export project complex

Posted: December 13, 2012 - 11:52am

By TIM BRADNER

Morris News Service - Alaska

The market situation for an Alaska gas pipeline and liquefied natural gas project may be getting more complicated and uncertain, a respected U.S. energy analyst said Nov. 28.

Mikkal Herberg, director of research, energy security, for the National Bureau of Asia Research, spoke Nov. 28 at an Alaska’s World Affairs Council meeting in Anchorage.

Herberg was international strategic planning director for Atlantic Richfield Co. for 20 years and now speaks frequently before business groups and congressional panels.

The Asia liquefied natural gas market is changing and the chief uncertainties that have been long recognized are whether Japan will restart its nuclear plants and rely less on LNG for power, whether China will continue its program to expand LNG import facilities or rely more on domestic gas or gas imported by pipeline, and whether Russia will go ahead with ambitious plans to build new pipelines and move gas from huge discoveries in East Siberia to the Pacific, Herberg said.

Japan’s decision on whether to restart tsunami-damaged nuclear power plants will affect the market as will a new drive by Japanese importers to change the pricing structure for LNG away from a link to crude oil prices.

The new wrinkles in the picture are mainly with new suppliers that are emerging to serve whatever the Asia market turns out to be. A host of new projects in Australia are being plagued with big cost increases, and some of these may fall behind or out of the race to get projects into production, Herberg said.

That could help Alaska, which would have its LNG into the market in or after 2023.

On the other hand, there is possible new competition for Alaska gas from exported shale gas. A huge political fight is developing in Congress over whether inexpensive U.S. shale gas should be exported as LNG, Herberg said. If shale gas export is approved and an enlarged Panama Canal allows it to be carried in large, efficient LNG tankers, this could undercut Alaska gas, which must bear the cost of building 800 miles of new pipeline from the North Slope.

Also changing the supply picture are large new offshore gas discoveries off east Africa, Herberg said. These will take years to develop but new LNG from East Africa could efficiently be moved to India and to south China, competing with Alaska.

Herberg said natural gas is in big demand in Asia because energy needs there are increasing and because it is cleaner than coal, which now supplies 50 percent of the region’s energy needs and two-thirds of China’s. Also, gas imported as LNG allows for energy supplies to be imported from diverse regions, a security consideration.

LNG is the preferred form of gas in Asia, too, because there are as yet no long-distance pipelines in the region serving markets like Japan. Of about 240 million tons of LNG sold annually in the world, 150 million tons are sold in Asia, Herberg said.

Market picture

Use of gas in the Asia region has tripled in the last 20 years and is expected to triple again in the next 20, but use of gas as a part of the region’s overall energy mix is still low, supplying 12 percent of Asia’s energy needs compared with about 24 percent for world’s, on average.

“Why is the penetration by gas still low? It is because the markets are still relatively small and separated by long maritime distances not easily connected by pipeline, such as from Southeast to Northeast Asia,” Herberg said.

LNG is being moved across these distances but LNG is also expensive and moving it by sea isn’t cheap, he said.

China, Japan and India and to a lesser extent South Korea are the major customers for LNG in the region and there are uncertainties that will affect each of these.

China is importing about 15 million tons per year now but its future need is expected to at least double to 30 million tons in the next 15 years, or it could grow to 75 million tons.

How much LNG is needed will depend on China’s continued economic growth and whether new gas pipelines from central Asia, Russia or Myanmar are built.

China also has shale potentially rich in gas and oil, and is working to develop its ability to fracture the shale and produce this gas. If it is able to do it, shale gas could become a major factor in the market there.

India presently imports about 15 million tons of LNG yearly and that is expected to double in about 15 years, Herberg said. Meanwhile, some Southeast Asia countries that are LNG exporters now are using more gas domestically and may be reducing exports, Indonesia for example.

South Korea is importing about 40 million tons a year of LNG and that is expected to grow.

Japan is a major unknown, Herberg said. It was importing about 70 million tons of LNG until its nuclear reactors were damaged in the 2011 tsunami and LNG imports
shot up to 85 million tons a year, which had a major shock to the market, driving prices up.

The big question for Japan is whether the government allows some of the shut-down nuclear reactors to be restarted. 

“Public opinion is absolutely against a restart of the plants, but the latest government plan is for Japan’s power industry to be nuclear-free by 2014,” Herberg said. How this plays out will have effects on the market.

Exporters, projects also uncertain

The LNG supply picture for Asia is becoming very uncertain, meanwhile, Herberg said. Qatar, in the Persian Gulf, has huge gas resources and now exports 80 million tons on LNG yearly, about one-third of total world demand. However, the government has put a moratorium on increases in LNG exports.

“It looks like Qatar will be flat in LNG exports,” Herberg said.

Russia now produces 10 to 12 million tons a year of LNG at the Sakhalin project with most of this sold to Japan, but Russia could become a much larger gas supplier to the region if long-distance land pipelines are built and a much-discussed large LNG project is built at Vladivostok, which would be served by a new pipeline.

The Russian projects are always uncertain, Herberg said. Big announcements are made, but nothing has yet been built except for the Sakhalin project, which was led by a western company, Shell.

In Australia there are seven or eight large LNG projects in the planning and development stages, but all of them are being adversely affected by cost increases, Herberg said.

Gorgon, the largest project which is
being led by Chevron, was estimated at $43 billion but is now estimated to cost around $50 billion, and there are some who expect costs to go to $60 billion. Other projects in Australia are similarly affected. Driving the increases are the tight markets in Australia for skilled labor, complicated by strained relations with strong unions there, tight
markets for materials and supplies, and the strong Australian dollar, which makes
domestic labor and materials very expensive.

The other major supply uncertainty is in the United States, where a strong lobby of manufacturers who have an interest in inexpensive shale gas has organized to get Congress to block, or sharply limit, exports of U.S. gas as LNG.

There are three LNG export projects that have been approved but others have filed applications. Most exports would be from the U.S. Gulf Coast. A federal government report on the effect of LNG exports on the domestic economy is expected after Jan. 1.

Herberg said most of the LNG export projects are assuming gas purchases for about $3.50 per million British Thermal Units, or Btus, which would translate to a delivered price of $12 to $13 per million Btus by the time it is made into LNG and shipped to Japan.

Even if Congress allows some shale gas to be exported, the pricing link will be to the U.S. Henry Hub gas price index, which will provide a break in the current pricing structure of linking LNG to crude oil, Herberg said.

Meanwhile, the viability of U.S. shale gas exports also will be affected if U.S. gas supplies rise. U.S. prices are now rising, partly because of a sharp drop in shale gas drilling, and are now averaging above the $3.50 per mmbtu price assumption used by the would-be exporters.

Key questions

The key questions for Alaskans to watch are the rate at which China will increase its LNG import; how Japan resolves its nuclear plant restart issues, and how Congress deals with the question of exporting LNG from the Lower 48 states.

The LNG pricing question must be watched, too. A big project like Alaska will put a lot of LNG into the market — a project moving 3.5 billion to 4 billion cubic feet a day off the North Slope would result in 15 to 18 million tons of LNG produced and shipped yearly.

That is one of the larger new LNG
projects on the horizon, and long-term, stable pricing and sales contracts will be needed to finance a project of that scale. Moving away from the traditional link of LNG with oil prices to some new pricing system would add new uncertainties, Herberg said.

“LNG markets will be very tight in Asia until 2015 or 2016. I wouldn’t expect any change in the pricing structure until after that, when new supply starts entering the market,” he said.

Herberg advised Alaskans to help move a North Slope project along as quickly as possible and for the state and industry to work together to make that happen.

 

“A good partnership with the state government is seen as very important,” by potential customers, Herberg said.

 

“Alaska does have some advantages. The state is closer to the market in distance, and the gas reserves are well-known and certain, and the industry is confident about adding more reserves,” he said.

 

Tim Bradner is a reporter for the Alaska Journal of Commerce.

 

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