Region to see LNG explosion

Andrew Symon, The Straits Times, Asia News Network, Singapore

High oil prices are not the only big energy story of the moment. Also grabbing headlines is the great promise of liquefied natural gas (LNG), shipped across the seas from distant gas fields to demand centers in the Asia-Pacific region.

Singapore is the latest country to become an LNG enthusiast. Vivian Balakrishnan, Minister of State for Trade and Industry, told Gasex -- a major international gas industry conference held in Singapore recently -- that the government wants to make the island state a regional trading center for LNG similar to its role in oil trading, as well as possibly importing more LNG to complement its natural gas supply from Indonesia and Malaysia.

Indonesia, long a major LNG supplier to North-east Asia, is also looking at consuming LNG domestically, taking LNG shipments from fields in the far east of the archipelago to Java, to fuel desperately-needed new power generation on the country's most heavily populated and industrialized island.

Meanwhile, on the other side of the Pacific, Australian Prime Minister John Howard stopped in California in the United States on his way to Washington, to visit state governor Arnold Schwarzenegger, in order to promote plans by the Anglo-Australian company, BHP Billiton, to export Australian LNG to the state.

BHP's scheme is one of several competing to become the first suppliers of LNG to the west coast of the U.S. and Mexico. Howard similarly took a direct role in the ultimately successful wooing by Australia's North West Shelf LNG facility of China for the latter's first-ever LNG import contract, signed in 2002.

Markets are expanding, new producers from the Middle East to the Russian far east and South America are entering the industry and new buyers are emerging, from India and China in the East, to the U.S. and Mexico in the West.

LNG consumption in the Asia-Pacific region could almost double by 2015. Last year, 77.5 million tons of LNG -- at a value of nearly US$20 billion (S$34.4 billion) -- were sold to Asian markets, of which 55.8 million tons were taken by Japan: 1 million tons of LNG can support approximately 1,000MW of power generation over a year. (1MW is enough energy for 2,000 five-room HDB flats in a month.)

By 2015, the Asia-Pacific trade could reach 150.5 million tons with the addition of new markets in China, India, the U.S. west coast, and within South-east Asia.

The new dynamics in the industry promise to transform LNG into a commodity-like fuel for large markets similar to oil and coal, and -- as is the situation in North America and Europe -- in the supply of pipeline natural gas.

Until now, LNG has been only a relatively limited source of energy in Asia, geared primarily to Japanese needs, and, more recently, markets in South Korea and Taiwan. From its historical role as a high-priced fuel for niche markets, almost a 'boutique' fuel, LNG seems to be on the way to becoming a mass market fuel, attractive both commercially and environmentally.

Great benefits would flow to the region. Natural gas is a very efficient and clean fuel. There is minimal environmental impact from its production, shipment and combustion.

Just 10 percent of Asia's primary energy consumption (including oil) is met by natural gas compared with 25 percent in North America and approaching 40 percent in western Europe. In Russia, it is more than 50 percent.

Until recently, LNG production was dominated by the majors, such as Shell and Mobil (now ExxonMobil), with considerable direction and participation by governments and state-owned companies, such as Malaysia's Petronas and Indonesia's Pertamina.

Buyers were also limited to the few large private power and gas utilities in Japan and the state-owned utilities and oil companies in South Korea and Taiwan. Contracts were very long term (20 to 25 years) and tended to be rigid. Prices were linked and closely indexed to changes in oil prices.

But much has changed in the last five years. The LNG industry is becoming much more dynamic as a result of new buyers and sellers.

India and China have become LNG buyers. The U.S. west coast seems certain to take LNG shortly and it must take LNG from the Asia-Pacific region. Mexico is also to take LNG, mainly to fuel power, and pipeline gas supply to California.

South-east Asia may soon become an LNG consumer with the Philippines planning to take LNG from Indonesia. Singapore is also considering taking LNG and Indonesia itself may ship LNG into Java from Indonesian Papua.

On the production side, an array of new projects are under way. The Middle East is sharply expanding supply, especially from Qatar. Iran, with huge gas reserves, is also intent on becoming a very larger producer. Yemen and the Russian far east are possible suppliers.

South America may also become a supplier from its Pacific coast; it has plans to pipe gas from Bolivia to Chile or Ecuador. Peru also is looking to supply the U.S. west coast.

In 1990, the average cost of LNG after production, liquefaction, shipping and regasification was $3.50 to $4.20 per million British Thermal Units (BTU). By 2000 that had fallen to $2.75 to $3.40 per million BTU.

Greater supply and demand diversity and technological change are being accompanied by greater commercial contract flexibility. Rigid long-term contracts are being complemented increasingly by shorter term contracts and more flexible terms and conditions.

Future supply to the U.S. could force radical change to the industry in the Asia-Pacific region. Producers would sell into what is already a very large and competitive domestic gas market supplied by Canadian and U.S. fields.

Such trade is similar to what already happens for crude oil and oil products supply in the Asia-Pacific region and, to some extent, for coal. A share of the LNG business in the Asia-Pacific region may also come to be under spot-trade conditions. The Singapore government is one which has identified a potential role for the island state as an LNG trading center alongside its long- standing role in oil trading.

But there are different views as to how extensive spot trade might become. Some argue that the still high capital costs of production, limited size of the LNG carrier fleet and technological constraints mean that long-term and medium-term contracts will continue to dominate the business.

In summary, the LNG industry in the Asia-Pacific region is poised for take off. The demand potential is unquestionable; the questions that remain are whether there are barriers to its progress -- such as commercial practices and government regulations -- that can be removed and whether there are other actions that governments and developers can take to accelerate its expansion.

The writer is a Visiting Research Fellow at the Institute of South-east Asian Studies.