WILL THERE BE A TWO-TIER LNG CONTRACT PRICING MECHANISM IN ASIA?

Transcription

1 WILL THERE BE A TWO-TIER LNG CONTRACT PRICING MECHANISM IN ASIA? By: Kyoichi Miyazaki Majed Limam Poten & Partners, Inc., New York Date: 5 th June, 2012 Venue: Kuala Lumpur, Malaysia

2 $/MMBtu 2 Gas prices worldwide continue to diverge 25 Gas and Oil Price Levels in Recent Years JCC 20 Oil linked LNG prices Japan LNG Price NBP 5 Henry Hub Gas on gas market prices Source: Poten & Partners Shale gas revolution drove down Henry Hub prices

3 LNG trade is too small to converge regional markets Gas-on-gas markets Oil-linked markets NBP Shale gas driven Henry Hub Oil Product JCC/Brent Henry Hub/ NBP/ Brent Global natural gas consumption LNG trade (long-term contract) 23% 8% Pipeline trade (cross-border) LNG trade (spot volume) 2% Domestic consumption 75% Source: BP Statistical Review of World Energy 3

4 Volatility* Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 4 Shale gas has reduced Henry Hub price volatility Volatility of Henry Hub, NBP, WTI, and Brent HH NBP WTI Brent *Standard deviation of natural log. Source: Poten & Partners Strong interest from Asian players to purchase North American LNG

5 MMt/y 5 Limited HH linkages in long term Asian contracts LNG supplies into Asia Increasing but limited share of North American LNG North America LNG 200 New Australian LNG Capacity New Australian LNG Capacity Others including current Australian LNG Capacity Others including current Australian LNG Capacity Source: Poten & Partners HH will not set long-term Asian LNG prices Asia remains predominantly oil-linked

6 Breakeven Costs ($/ MMBtu ) 6 Increasingly expensive LNG supply projects 14 Challenging cost structures for green field projects in Asia Pacific New Australian Projects Shipping Upstream + Liquefaction 8 6 Qatari Projects Early 2000 s Now Projects Source: Poten & Partners Australia has set recent Asia long-term LNG price, requiring oil linked price

7 Can local Asian gas-on-gas market develop? Important factors for Asia to develop an effective, liquid, transparent and trusted gas-on-gas market Diversified sources of natural gas supply (domestic production, LNG & pipeline imports) Interconnected gas transmission pipeline system Substantial storage capacity High liquidity Deregulated and competitive infrastructure, including in natural gas upstream, transportation and trading Transparent market with limited government intervention A large, liquid and efficient futures market Physical connectivity and deregulation are necessary to create natural gas hub 7

8 LNG import share (%) in Asia Pacific 8 Changing landscape of Asian LNG markets Entering an era of more diverse LNG buyers with China s increasing presence 80% 70% 60% Japan 50% 40% 30% 20% 10% South Korea Taiwan Non-JKTCI China India 0% Source: Poten & Partners

9 Bcm/y 9 China has potential for gas-on-gas market development China Diverse Natural Gas Supply Sources LNG Import Pipeline Gas 100 Domestic Gas Source: Poten & Partners

10 Source: Poten & Partners, various sources 10 but challenges remain (e.g., market price reform) Current pricing misalignments Supply Cost Wholesale Price Retail Price Domestic Gas Production ($1-2/MMBtu) $7.6/MMBtu Central Asia Pipeline Gas (Turkmenistan-China Border - $11/MMBtu*) * Based on customs data released on 30-April-2012 LNG ($17.7/MMBtu for new signed contracts) *Poten s Estimation Assuming Oil-linkage Delivered to Shanghai $15.5/MMBtu Weighted average price for new contracts by end of 2011 City Gas (main use to date) $13.5/MMBtu including local distribution cost Power Generation (emerging use)

11 11 It took over thirty years for US/UK gas-on-gas markets to develop US Deregulation process started 1970s from unbundling 1970s 1980s 1990s 1970s Natural Gas Policy Act put FERC in charge of intrastate and interstate natural gas production. 1980s US eliminates take-or-pay clauses from gas supply agreements to create competition among natural gas suppliers. 1990s Pipelines and other facilities, including LNG terminals, were transformed into capacity service providers through Open Access. NYMEX started Henry Hub trade. UK Deregulation process started in 1980s with privatization 1970s 1980s 1990s 1980s Liberalization began with the Natural Gas Act in 1986, which set the necessary regulatory framework. 1990s British Gas split into Centrica (gas retail and distribution) and BG plc (upstream, transmission and storage) in 1997 and then split again in 2000 when Lattice was established (transmission now National Grid). Resale of pipeline capacity amongst shippers was allowed in NBP started in 1996.

12 Oil-linkage will remain the basic long-term contract pricing indexation in Asia Gas-on-gas market price will not become a common long-term indexation in Asia Oil-linked pricing critical for complex and expensive new LNG supply projects in Asia A foreign gas-on-gas market price will have limited and indirect impact on Asian LNG long-term pricing Lower slope to oil price and S-curve structures as supply competition increases, assuming that HH remains at a substantial discount to oil It will take more than a decade for Asia to develop any indigenous gas-on-gas market pricing mechanism, along the lines of HH and NBP Any Asian gas-on-gas market development will require further deregulation, liquidity, transparency and competition in the market. 12