The Asia-Pacific Region: A market niche for Russia s LNG, and price change drivers Anastasiya Masalkova Senior Lecturer Department of Economy Theory, Gubkin Russian State University of Oil and Gas Italy, Rome, June 12 th 2015
Focus and Overview of Key Topics RUSSIAN LNG PROJECTS LNG pricing APR s gas market A market niche for Russia s LNG in APR
Russian LNG projects
LNG Vectors at present..
and LNG Vectors in the Future
LNG exports reflect «managed competition» between the new oligopoly in Russian gas sector
Export sales based around LNG and piped gas
LNG Pricing
LNG-Commercial Interactions Between East and West
Oil-linked Pricing Dominant in Core Markets
Pricing of LNG example Data: http://www.capp.ca
Does the drop in Asian LNG spot prices reflect a lack of LNG demand growth or the low oil price environment
The declining oil prices has capped LNG spot prices through oil switching, but the Asian LNG market has been weakening
APR s gas market
The Asia-Pacific Region (APR) APR: countries of South, East and South- East Asia and Oceania 16
APR s gas market: Facts The fastest growing demand for gas: over 5% per year(the average global rate being 2.2%) Gas share in the energy balance: 11% (the average share worldwide being 25%) The largest LNG market by volume: The region consumes up to 70% of the global LNG imports The APR accounts for 30% of LNG production 80%-the percentage of LNG in the imports Potential growth by 200% up to 2035. 17
Breakdown of gas consumption in the APR, 2012: 625 billion cub.m Share of gas consumption: 625 billion cub.m Gas consumption growth rates (the region s average being 5.0%) Pakistan 7% Malaysia 6% South Korea 8% Thailand 9% Others 12% China 24% 8,2% 9,9% 10,3% 8,8% 5,6% 7,8% 9,6% 10,6% Japan 19% India 9% Indonesia 6% 18
A market niche for Russia s LNG in APR
Forecasted production and consumption in the core markets 1400,0 1200,0 1000,0 800,0 Forecasted gas consumption by key regions, billions of m3/year 1038 Gas production and consumption in 2035 1172 1245 1251 1274 827 600,0 2015 2020 2025 2030 2035 North America Europe & Eurasia Asia Pacific Source: BP Energy Outlook 2035 North America Europe & Eurasia Consumption Asia Pacific Production
The present and future of APR s gas market 2012 Total consumption: 625 billion m3 Imports; 155 Producti on; 470 Growth by 200% or 9% per year 2035 Total consumption: 1,274 billion m3 Imports; 447 Production 827 Source:BP 2013, Roberto F. Aguilera et al, The Asia Pacific natural gas market: Large enough for all?. Energy Policy, 2014.
APR s requirement of gas imports Additional requirement for imports from 2012 to 2035, billions of m3 94 98 Imports by2035: 447 billion m3, including: LNG 337 billionm3 (248 million t. LNG) PNG 110 billion m3 62 37 29 PNG 22% LNG 78% 2015 2020 2025 2030 2035
Meeting the demand for LNG up to 2035, M tons/year 20 10 0 1.Russian LNG supply projects 17,6 10 5 2,6 2018 Ямал СПГ Владивосток СПГ Печора СПГ 2. Contracted LNG in APR by2014 139 Meeting the additional requirement for LNG imports 49 49 30 30 60 75 78 Niche: 15 M tons/year 23 Китай 65,5 73,5 2014 Япония и Корея 2015 2020 2025 Contracted LNG 2030 2035 Demand for LNG
The Asia-Pacific Region: Current level of LNG prices
Pricing in the APR: Facts The LNG market in the region follows the pattern of Japanese LNG contracts: o The principle of Market Value Pricing: The LNG price is linked to the crude oil price as its key substitute in the target consumption sector (Japan) power generation Key price indices: o o JCC - Japanese Crude Cocktail ICP Indonesian Crude Oil Price Key price index formulas: o o Linear S-curve Prior to the 2000s, the LNG price was linked to the Asian Premium crude oil price with a premium. 25
APR s gas prices are higher than in the core markets 700 600 APR (Japan) Europe APR 500 400 300 Europe (UK) USA Europe Europe (UK) 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $/1,000m3 USA
Correlation between the price level and the indexation form $/MMBtu 20 18 16 14 12 10 8 6 4 2 0 Correlation between LNG and crude oil prices in the APR Цена нефти марки Dubai Цена СПГ в Японии 17 15 19 12 26 24 34 62 94 78 109 $/bbl Year CIF prices, $/1000m 3 Dubai crude, $/bbl 2000 173 26 2001 170 23 2002 156 24 2003 175 27 2004 190 34 2005 221 49 2006 261 62 2007 283 68 2008 459 94 2009 332 61 2010 399 78 2011 539 106 2012 613 109
Correlation between the price level and the indexation form $/MMBtu 20 18 16 14 12 10 8 6 4 2 0 Correlation between LNG and crude oil prices in the APR Цена нефти марки Dubai Цена СПГ в Японии 17 15 19 12 26 24 34 62 94 78 109 $/bbl $/MMBtu $/MMBtu 6 5 4 3 2 1 0 6 5 4 3 2 1 0 Linear formula LNG price Crude Oil price 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 $/bbl S-curve 8 9 1011121314151617181920212223242526272829 $/bbl Crude oil Parity S-curve
LNG price level by the end of 2013 $/MMBtu 20 18 16 14 12 10 8 6 4 2 0 China LNG Japan LNG S. Korea LNG Indian LNG Japan/Ko rea Marker (JKM) (Spot) Oil price parity at 100$/ bbl $/MMBtu 15,25 15,65 15,65 13,75 17,348 17,24 $/1000m3 558 573 573 503 635 631 Data: Federal Energy Commission USA, Plats $/1000m3 29 700 600 500 400 300 200 100 0
Asia-Pacific Region Drivers of the LNG price change in APR
1. Exchange trading started in the APR May 2013: The LNG Hub opens in Singapore SLNG (Singapore LNG Terminal) capacity: 3.5 Mtpa(two-week gas consumption in Japan), with an option to expand up to 9.0 Mtpaand more. Prospects of LNG exchange trade in Singapore: Criticism: lack of volumes for gas (LNG) trading -low market liquidity. Facts: 1. Japanese, US, Australian, Indian and European companies are getting ready for participation in LNG trading: the traders are hired, the volumes are allocated. 2. The lack of APR market niche for Russian gas before 2025 opens an opportunity for short-term deals with Russian LNG at the Singapore Exchange.
How will exchange trading influence the regional price level? Initially, the low liquidity will inhibit full-scale LNG trading. The Singapore Hub will not be the main point for LNG trade but: It will turn into a supply balancing tool Price in hub will become an alternative price indicator(for oil baskets like JCC) It will contribute to a change in the regional price level Subsequently, it will result in pricing transformation in APR: migration from crude oil indexation to exchange pricing.
2. Prospects of methane hydrate production and its impact on LNG price Japan: Research of commercial production potential of natural gas hydrate (NGH) and subsequent power generation using marine plants by 2018. Implications of NGH commercial production launch in Japan: Increase in electricity supply reduction in electricity prices MH competing with LNG via electricity price LNG prices revised downward. Dissemination of production technologies to neighboring countries (China, Korea) LNG price revision linked to the electricity or MH cost.
Prospects of Russian gas exports to the APR There is a potential for increased LNG supplies from Russia to APR countries but: A flexible marketing strategy is required: o Long-term contracts combined with participation in exchange trade. o Pricing mechanisms for LNG contracts ensuring the competitiveness of prices for Russian gas in the buyer s end market, including: Crude oil price indexation, with downward revision ( - 10%) Use of exchange price indicator Hybrid model: exchange prices +crude oil price indexation: (30%/70%, 40%/60% etc.) Netback(or indexation) based on electricity and other prices. 34
References: 1. IGU World LNG Report 2014. 2. Exxon Mobil 2014. 3. BP Statistics 2013-4. 4. SHWE Gas Movement. 5. IHS CERA, various sources. 6. BP Energy Outlook 2014. 7. Eriras.ru. 8. Argusmedia.com.
Anastasiya Masalkova PhD Senior Lecturer Department of Economy Theory, Gubkin Russian State University of Oil and Gas, Leninsky prospect, 65-1, 119991, Moscow, Russia masalkova.a@gubkin.ru
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