Unconventional gas driving evolution of Asian LNG

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Nick Browne, Senior Analyst, Gas Research, Wood Mackenzie
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Next month’s Annual Gas Asia Summit (GAS) in Singapore will focus on the theme of "Multilateral Co-operation to Connect Gas Markets" and explore the strategic and commercial challenges faced throughout the region. Nick Browne, Senior Analyst, Gas Research at Wood Mackenzie, will deliver a presentation on the role and implications of US LNG for Asian LNG buyers. Ahead of his involvement at the summit, Gastech News asked him about the potential impact of unconventional gas on Asia’s power markets and the evolution of Asian LNG contracts.

Gastech News: The latest data from the US Energy Information Administration shows that the North American shale gas revolution continues to gain momentum. Also, there are hopes that this revolution may be replicated elsewhere, including in Asia, notably in China. What impacts do you expect the growth of unconventional gas production to have on power markets in Asia?

Nick Browne: The impacts of unconventional gas on Asian power markets will be two-fold. Firstly, several Asian utilities have signed deals for US LNG. This will introduce an additional source of volatility into delivered prices. Of course, given low Henry Hub prices, it may also be cheaper than other LNG sources, reducing average prices – even though we expect only a percentage of US LNG to be delivered into Asia.

Secondly, several Asian countries are seeking to encourage unconventional gas production and are hoping to replicate the US success story and subsequent low gas prices. If successful, the impact of this would be long-term.

Gastech News: What are the prospects for monetizing and commercialising stranded gas for power generation in Asian markets?

Nick Browne: The definition of a stranded gas reserve is generally one that is too remote from a market to facilitate pipeline construction. However, it can also mean gas reserves which cannot get access to pipelines. Both of these happen relatively commonly in some Asian markets. Monetizing via power generation is an option, but frequently stranded gas reserves are also located some distance from sizeable power markets. Consequently, other methods such as small-scale LNG are under consideration in countries such as Indonesia and China. 

Gastech News: How quickly do you foresee Asian LNG contracts evolving towards a more international contract structure?

Nick Browne: Asian LNG contracts are evolving in several ways. Firstly, long-term deals of over 15 years are generally becoming less common. This is related to both demand uncertainty on the part of buyers but also uncertainty in some cases about the availability of gas for export from some supply areas in Asia and the Middle East.

Secondly, there has been an increase in destination flexibility in contracts. For example, recent years have seen some tripartite deals signed, for example between Eni, Chubu Electric and Kogas. This enables the two off-takers to optimise cargoes between each other as required. Clearly, the entry of US LNG into the Asian market will further increase the amount of destination flexible LNG.

Thirdly, Asian contracts increasingly involve pricing indexations other than just JCC.

Gastech News: How will changing contract terms impact the Asian market?

Nick Browne: Changing contract terms are introducing increased diversity and flexibility into the Asian market. This will lead to more trading and opportunities for arbitraging between different pricing mechanisms. Access to more flexible volumes is also leading to a pick-up in the activities of emerging LNG players. These companies sense the opportunity to challenge established incumbent players in some markets.

However, it can also have some downside, as suppliers trying to develop new green-field projects are facing a more uncertain and rapidly changing market in Asia. This is making agreements on long-term contracts more difficult and is putting increased pressure on project financing.

(Image courtesy of Singapore LNG Corporation)