Asia is one of the primary regions driving global energy demand and is expected to be central to the growth of the global natural gas market going forwards. Whilst Japan and South Korea are currently the world’s largest importers of LNG, with the post Fukushima surge in Japan’s import demand contributing to the tight market we see today, going forwards the trading decisions of China and India are expected to shape the future of Asia’s LNG market. Going towards the end of the decade, the outlook for the region’s LNG market is expected to become increasing complex, with a number of projects in the planning and construction phases across Asia Pacific, and a predicted rise in global LNG imports; firstly from North America, and later from the emerging East African market. On the demand side, the prospect of China embarking upon wide-scale unconventional gas development may also impact significantly on LNG contracts over the longer term. The following period is also anticipated to be a challenging time for the region’s established exporters, in particular Indonesia, where domestic demand is growing at an unprecedented rate and declining production is posing a significant challenge to state operator Pertamina and its partners.
Indonesia is expected to ramp up investment into liquefaction projects over the forthcoming five years and will overtake Malaysia as South East Asia’s largest investor in new floating LNG projects. Expenditure is expected to be driven by the Inpex-operated Abadi multi-phase FLNG project, where Infield Systems expects the first phase of development, an FLNG unit, to be installed in water depths of 457 metres, to come on-stream in 2019. Indonesia’s domestic demand is growing at an unprecedented rate, whilst with a number of existing Indonesian fields reaching the end of their current license periods, lack of investment is resulting in declining production rates. With imports expected to increase substantially going forwards, investment into regasification infrastructure is anticipated to rise, with Infield Systems expecting state operator Pertamina to construct a further seven import terminals over the 2015-2019 timeframe.
Offshore Malaysia the world’s first FLNG development, PFLNG1 saw its hull launch in April 2014, with the facility, constructed at the DSME shipyard in South Korea, expected to be completed by the close of 2015. PFLNG1 will be located some 180 kilometres from shore on the Kanowit field and once on-stream is expected to produce 1.2 million tonnes of LNG per year, which will represent a significant landmark in both LNG production and also the development of remote reserves. Indeed, with February 2014 seeing the Final Investment Decision on the PFLNG2 facility, NOC Petronas appears to have confidence in the prominence of FLNG to Asia’s future offshore landscape In terms of FLNG capital expenditure, Infield Systems’ forecast places 2014 as Malaysia’s peak year, with expenditure on the procurement and construction phases of PFLNG1 and PFLNG2 both underway. Going forwards, Malaysia’s Capex spend on FLNG development is expected to remain strong through to the installation of PFLNG2 in 2018, however, as highlighted in Figure 1, with increasing floating LNG spend on Australian projects, in addition to increased investment offshore Indonesia and emerging countries such as Papua New Guinea and Brunei, the relative Capex share of Malaysia’s offshore LNG projects is expected to decrease over the forthcoming five year period.
Whilst investment into South East Asia’s LNG prospects is expected to increase over the forthcoming five years, demand is expected to far outstrip the pace of development. As such Australia, and towards the end of the period projects off Papua New Guinea (PNG), are in a prime position to absorb this growing demand. Between 2009 and 2012 Australasia saw unprecedented investment in its capital intensive natural gas projects, with key projects including the Greater Gorgon Jansz field development, whilst Infield Systems’ historical data shows capital expenditure commencing on Australia’s first FLNG development, the Shell-operated Prelude, in 2011 . During the previous five years investment into Australia’s offshore sector was spurred on by a buoyant economy in comparison to other Western markets, combined with unwavering energy demand from the neighbouring South East Asian region. Going forwards, Australia is expected to continue to lead Asia Pacific in floating LNG developments with its capital expenditure accounting for 79% of the entire Asian and Australasian offshore FLNG Liquefaction spend throughout the 2015-2019 timeframe. Prelude, is expected to continue to lead Capex demand, with production currently expected to start in 2017. Significant expenditure is also expected on ExxonMobil’s Scarborough LNG development, which saw environmental approval in November 2013 and the GDF Suez Bonaparte project, located some 250 kilometres from shore and forecast to enter production in 2019 , although given recent time overruns on the project this may be delayed.
However, whilst Australia, with the benefit of first mover advantage in the offshore LNG market looked set to capitalise on its neighbours’ demand, competition for this key global market has risen in recent years. Despite new long term supply contracts between Australia, PNG and China having been drawn up, recent deals between China and Russia may undermine Australia’s position, specifically an agreement to transfer 38 bcm of gas per year, which will see China accessing supplies at a lower cost than Australia’s exports. This, coupled with development challenges in bringing North Western Australia’s capital intensive projects into production; brought on by high labour costs and material inputs, will inevitably affect the strength of Australia’s LNG market going beyond the end of the decade.
Australia also faces competition from Western markets. North America is expected to emerge as one of the key players within the Asia Pacific LNG sector. India is already looking towards America and Canada, with March 2014 seeing the Indian Oil Corporation Ltd acquiring a 10% stake in Petronas’ British Columbia-based LNG export project and with North America’s exports expected to become cheaper than oil-linked Qatari supplies going forwards, the dynamics of not just Asia’s, but the global LNG market are expected to alter significantly. In addition, with the expansion of the Panama Canal, larger Gulf Coast shipments will be able to enter the Asian markets in the not too distant future. This, combined with the emerging East African LNG market over the longer term, itself expected to become a key supplier to India’s east coast, will increase the diversity of supply within Asia’s market. With the increasing number of exporters entering the region, a more competitive and flexible market is likely to emerge, with importers likely to turn away from long-term contracts in favour of short-term agreements.
With the predicted increase in imports, Infield Systems expects Capex demand for regasification projects and LNG importing infrastructure to also increase substantially over the forthcoming period. India is expected to lead floating regasification capital expenditure, with a 53% share of Asia’s floating regasification Capex over the 2015-2019 period, with substantial investment expected on the Kakinada Andhra Pradesh LNG import FLRSU and the Krishna Godavari LNG FRU. China, the Philippines and Pakistan are also expected to direct significant expenditure towards the development of floating regasification projects going forwards. Altogether, Infield Systems expects a total of 32 LNG regasification projects to take place within China (both new build terminals and extensions), and a further 27 regasification terminal developments to take place within India over the 2015-2019 timeframe.
With this rise in imports going forwards, the region’s business capital Singapore is expected to emerge as the centre of LNG trade, with a number of global operators and contractors moving their LNG divisions to the city-state and plans already in place to build a second receiving terminal for LNG. Whilst Singapore currently generates more than 90% of its electricity using natural gas, the capacity of the new terminal is expected to be some three times as much as Singapore consumes and this, combined with the expansion of its existing terminal, will place Singapore in an extremely strong position to emerge as the global LNG trading centre of the future. Singapore’s position has been further enhanced recently, by the completion of the deal whereby Singapore’s Pavilion Energy has obtained, by farm out, a half share of Ophir’s offshore Tanzanian gas holdings.
By the end of the decade, China has the potential to overtake South Korea to become the world’s second biggest LNG buyer after Japan. However, China’s import needs will also depend on how successful the country is in developing its shale gas reserves, estimated to be the largest in the world. Indeed, if China manages to replicate North America’s shale boom, the global demand dynamic for natural gas may alter significantly. In addition, with gas prices remaining relatively high, coal consumption is likely to remain the primary fuel for some years to come. Whilst the Chinese government plans to cap coal consumption in its highest consuming provinces, as set out in its Clean Air Plan 2013, significant efforts will need to be made in order to reduce China’s absolute coal consumption going forwards and encourage the greater use of natural gas, coal-to-gas and renewable sources in the key consuming provinces.
The following five years will be a pivotal period in the development of the global LNG market, with Asia Pacific playing a central role. With a number of industry milestones taking place within the region over the 2015-2019 timeframe, most notably the development of a number of FLNG projects, Asia Pacific is expected to continue to lead global technological development, whilst its increasing energy consumption and interest in opening up to global LNG markets will significantly alter the face of world LNG trade going forwards.