IPTC MS The Outlook for LNG Supply to Asia. Stuart Traver, Lalitha Seelam and Nick Fulford Baker Hughes Inc. and Gaffney, Cline & Associates

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1 IPTC MS The Outlook for LNG Supply to Asia Stuart Traver, Lalitha Seelam and Nick Fulford Baker Hughes Inc. and Gaffney, Cline & Associates

2 Slide GLOBAL NATURAL GAS TRADE Units: billion cubic metres (bcm) Total Natural Gas(NG) trade flows ~1 Tcm - Liquefied Natural Gas (LNG) (31%) ~80% of the NG exports to Asia Pacific (APAC) region are supplied as LNG Japan is the largest LNG importer accounting for ~40% of global LNG trade

3 Slide 3 TABLE OF CONTENTS Current Situation Near Future Market Analysis Emerging Trends Conclusions

4 Slide 4 CURRENT SITUATION

5 Slide 5 GLOBAL LNG SUPPLY Source: International Gas Union (IGU), Oil and Gas Journal Global liquefaction capacity reached ~290 Million Tonnes per annum (MMTpa) in 2013 After a decade of rapid growth, the addition of new capacity has slowed

6 Slide 6 GLOBAL LNG DEMAND Note: RoW Rest of the World Source: IEA, IGU Since 1990, global and Asian LNG demand increased at ~6% and 7% CAGR respectively Asia has regained its share of the market for LNG after slipping to 60% in 2010

7 Slide 7 ASIAN LNG DEMAND Source: IEA, IGU Traditionally, Pacific Rim countries - Japan, Korea and Taiwan are the largest LNG importing countries in Asia China began LNG imports from 2006 and became the 3 rd largest Asian importer in 2011 India s LNG imports have grown by 11 MMT since 2004 Malaysia, Thailand and Singapore began importing LNG in recent years

8 Factors favoring Asian LNG Demand Slide 8 Asia has less gas reserves and most of the demand centers are in widely dispersed coastal locations The region has less extensive natural gas transmission infrastructure compared to US and Europe Higher economic growth in the region leads to greater energy consumption Problems faced by alternative supply sources (e.g. Fukushima) have placed greater focus on LNG The desire exists to reduce urban pollution caused by coal usage in power generation Traditional LNG exporters turning into importers due to maturing gas assets and increase in domestic consumption (Indonesia, Malaysia)

9 Slide 9 NEAR FUTURE

10 Slide 10 Future LNG Supply - Under Construction Source: IGU ~110 MMTpa of LNG capacity is expected in the next five years Australia is expected to add up to ~62 MMTpa liquefaction capacity during the period (~55% of total capacity additions) New breed of floating LNG (FLNG) projects are entering the market adding ~6MMTpa capacity : PETRONAS FLNG1 (2015) in Malaysia Prelude in Australia (2017) and PETRONAS FLNG2 (2018) in Malaysia

11 Future LNG Supply - Planned Slide 11 Source: IGU, Other sources ~70 MMTpa of LNG capacity is planned during the next five years North America has ~30% of the planned capacity Different factors will influence whether FID is achieved: Lack of infrastructure, political and regulatory risks in East Africa Project over-runs in Australia Regulatory barriers in US Project delays in Canada

12 Factors affecting the Future LNG Supply & Demand Slide 12 Supply Factors Project Costs Type of supply source Security of supply geopolitical considerations Source: Cheniere Energy Demand Factors China s plan to increase gas demand to 10% of the nation s energy mix Economic development Potential for softening of LNG pricing and terms (duration, take or pay etc.)

13 Type of Supply Conventional Vs Unconventional Slide 13 Source: IGU, APPEA Unconventional projects account for ~62 MMTpa capacity Australia s Queensland Curtis project based on coal seam gas with capacity of 8.5 MMTpa is the first unconventional project slated to come online in 2015 US unconventional projects are not sourced from a single asset but from pipeline systems in the Gulf Coast

14 LNG Project Costs (Under Construction) Slide 14 Source: Company presentations, IEA, Oxford Energy and GCA Analysis The Australian project costs are highest among the projects under construction Pacific Rubiales is a barge mounted liquefaction plant which has the lowest cost estimate The costs are relatively low at US$670/tpa for Sabine Pass LNG due to its existing storage, marine facilities and preconditioned gas supply The comparison presented does not address various key differentiators: scope location and complexity

15 Slide 15 Asian LNG Supply and Demand MMTpa LNG Supply and Demand for Asia '14 '15 '16 '17 '18 '19 '20 Supply Asian 8% CAGR Source: IGU and GCA Analysis In the next 5 years, a surplus of LNG supply is projected even under higher than historical growth rates for demand The result should create a favorable market for LNG buyers Planned additions to LNG capacity may be deferred until after 2020 reducing the imbalance

16 LNG Supply for Asia (2020) Slide 16 Source: IGU, IEA and GCA Analysis New LNG capacity will be added at higher delivered costs of up to US$14/MMBtu to N. Asian customers (Japan is shown here) The supply and delivered cost of US ~US$11/MMBtu is based on the widening of the Panama Canal The higher cost suppliers are most at risk of lower capacity utilization and deferment of planned capacity

17 Slide 17 MARKET ANALYSIS

18 LNG Market is Tilting Towards Buyers Slide 18 High Buyers able to access diversified supplier base Spot market development High Buyers have got greater choice Many suppliers Shipping costs now smaller part of price High Capital Intensive Takes 10 years from concept to commissioning Medium <10 main LNG EPC companies Limited number of turbo machinery suppliers Low Pipelines or indigenous production Takes longer time to substitute pipeline supplies

19 Slide 19 LNG Prices on Oil and Gas Indexes Delivered Price to Japan ($/MMBtu) % /Mcf +7/Mcf +6/Mcf Oil Price ($/Bbl) Henry Hub Gas Price ($/Mcf) 12% 10% Gas-indexed LNG Delivered Price Oil-indexed LNG Delivered Price Commodity price movements may make LNG linkages indifferent; lower oil prices reduce the advantage of gas exports priced using the Henry Hub index The blue zone represents the zone of indifference between oil and gas linked prices The advantages of seeking US supplies may end up being mainly supply security and pricing leverage against other suppliers during a buyers market

20 Slide 20 EMERGING TRENDS

21 Slide 21 Shift in Global LNG Trade Shale gas production in the US shall soon convert the nation from a net importer to a net exporter The major LNG exporters to US were Trinidad & Tobago Yemen Qatar Norway Nigeria These supplies may be redirected to Asian markets Growing concerns in Europe over security of pipeline supplies from Russia may boost LNG demand from western European countries

22 Slide 22 LNG Prices LNG buyers in N. Asia pay prices near to crude oil imports on a heat equivalent basis; long term contracts have traditionally been linked to Japan Crude Cocktail With the increase of shale gas production in the US, the country is expected to export LNG from 2015 LNG exports arising from US tolling agreements are expected to be purchased at lower prices in the next few years than from suppliers on oil based contracts based on the outlook for HH and crude oil prices Asian countries such as Japan, India and Indonesia have taken stakes in the US projects to improve security of supply and for supply diversification

23 Slide 23 Deregulation in Japan In 2016, Japan is planning for liberalization of gas and power wholesale markets US, UK and Europe experienced unforeseen outcomes during deregulation Legal disputes regarding Take or Pay oil indexed contracts Aggressive players gaming the market Modification or renegotiation of long term existing contracts Financial stress for some gas buyers and sellers Emergence of hub based prices and new trading paradigms The positive factor is a more vibrant gas market!

24 Slide 24 Singapore LNG Singapore is pursuing a strategy to become Asia s LNG trading hub to leverage its geography and stature as Asia s oil trading hub First LNG terminal became operational in 2013 Capacity is about ~90% of Singapore s gas consumption Includes bunkering facilities 5 MMtpa additional capacity under construction Developing plans to build a second terminal with operations commencing in 2025 timeframe International companies are expanding in the region in order to participate in supply and trading in Singapore

25 Slide 25 Technology - Floating LNG (FLNG) FLNG is an emerging technology that may bring future improvements in terms of Cost Environmental footprint Flexibility Source: Shell Currently, it is promoted for offshore stranded gas monetization but can also be utilized for onshore purposes Results will be closely watched by LNG players

26 Slide 26 CONCLUSIONS

27 CONCLUSIONS Asia has remained the largest LNG consuming region Based on near future trends, buyers are experiencing more choice and greater market power Increase in LNG supply Availability of diverse supplies Alternative pricing models Technology improvements in floating solutions should lead to decreases in unit production costs of LNG Spot trading continues to grow, regional hub pricing in Asia may emerge Global price integration may follow as LNG market and customers become more diverse, and international trade arbitrage increases Proper buying strategy must be developed to enhance supply security and optimize delivered costs of LNG Slide 27

28 Slide 28 Thank You