By ADRIENNE BLUME
Goyang City, KOREA
-- The Monday morning panel at Gastech
discussed a number of recommendations for securing Asia's gas
demand, from a demand-side perspective. Moderated by Nick
Milne, First VP and LNG specialist at Bank of
Tokyo-Mitsubishi UFJ, the panel emphasized the need to
restructure LNG pricing mechanisms and enable destination
flexibility for export contracts with Asian buyers.
Milne outlined several key themes relating to Asian energy
demand, including emerging growth in terms of the changing
energy mixspecifically, growth in import demand from
non-traditional sources, including China, Thailand, Singapore
and Indonesia. Diversity of gas supply is another major
theme, with new supplies coming from such places as Canada
and East Africa. In this vein, the use of new technology
to develop gas
supplyi.e., floating LNG and innovative GTL
technologiesis contributing to the diversification of
supplies. "In a world awash with cheap gas, it's easy to see
a path forward for gas-to-liquids," Milne commented.
The moderator then posed the question: "How do people
position for growing gas demand from Asia?" The percentage of
Asian national oil companies (NOCs) in global merger and
acquisition (M&A) activity is growing, and is presently
pegged at approximately 20%. Three major themes with regard
to meeting the growth in Asian demand, according to
Milne, and later discussed by the panelists, are the
push for restructured gas pricing, the competitiveness of gas
versus other fuels (i.e., coal and nuclear power), and the
roles of pipeline gas and LNG in long-term demand and pricing
Securing cheaper gas for Asia
Milne yielded the podium to Young-Sik Kwon, the executive VP
and COO of KOGAS' Resources Business Division. Kwon
spoke about Asian gas buyers' strategies for securing cheaper
gas. Presently, nearly 70% of global LNG imports are
delivered to South Korea, Japan, Taiwan and China; however,
high prices make import of the fuel very costly for buyers.
To secure cheaper LNG, Kwon said, comprehensive strategies
must be built, including the establishment of a gas
"portfolio" approach, improving market efficiency and
enhancing cooperation among buyers.
A portfolio approach would require the diversification of
price formulas and LNG sources, while market efficiency
improvements could be secured through linkage to Henry Hub
gas prices, increased buyer participation in global LNG project
development, and the
reduction of shipping costs through destination-free LNG and
swap arrangements. The LNG market is systematically
inefficient for Asian buyers due to oil-linked formulas,
which raises shipping costs, Kwon noted.
The third strategy for securing cheaper gas is to boost
cooperation among buyers through joint purchases to secure a
competitive LNG price. Pipeline gas would make a positive
impact, as it diversifies energy sources; however, the
panelist cautioned that importing pipeline gas should be a
mid-to-long-term goal, due to price competitiveness,
infrastructure requirements and geopolitics.
To these ends, KOGAS is actively participating in global LNG
projects, such as Shell Australia's Prelude FLNG, the
Mozambique Area 4 gas development and LNG Canada. KOGAS was
also the first Korean company to secure gas exports from
Cheniere Energy's Sabine Pass project in the US.
The next panelist to speak was Shigeru Muraki, executive VP
and CEO of Tokyo Gas Co. Ltd.'s Energy Solution Division.
Muraki provided the audience with commentary on the new
dynamics of the Asian gas market.
Diversification was the key word in Muraki's
speechdiversification of supply sources and systems, of
contractual conditions, and of infrastructure. New supplies
from the US, Canada, Mozambique and East Siberia could
provide Asia with alternative import sources, while new
pricing mechanisms, such as oil-indexed gentle slope, Henry
Hub, S-curve, short-term contracts and spot contracts, could
provide flexibility in terms of import costs.
Pipeline connectivity and infrastructure development are
other major concerns for Asian gas buyers. Muraki cited the
development of a North-to-East Asia pipeline, cross-border
pipelines from Russia and Central Asia to China, a pipeline
from Russia to Japan and South Korea, and interregional
pipelines, as critical options for the development of gas
trade. Muraki also noted that the development of regional
shale gas and methane hydrate reserves could spur increased
inter-regional gas trade.
In Japan, LNG has provided a steady source of gas in the wake
of nuclear plant shutdowns since 2011. Nuclear plant restarts
will cause the high volume of LNG imports to Japan to
decrease to around 70 million tons (MMt) through 2020, from
the recent high level of approximately 87.5 MMt. However,
nuclear capacity will gradually decline again after 2020,
leading Japan to import as much as 100 MMt of gas by 2030,
LNG prices must be reduced
Hirobumi Kawano, the president of Japan Oil, Gas and Metals
National Corp. (JOGMEC), next spoke about shale gas from the
US, which could greatly impact global and Asian energy
markets, as more export permits to non-Free Trade Agreement
countries, such as Japan, are approved for US LNG projects.
Canada is also looking to Asia as a potential large market,
while Asian buyers are eyeing Russia and East Africa for new
supplies, as import dependency expands in China, India
and Southeast Asia.
However, high LNG prices are a serious problem, Kawano said.
He noted that the cost to transport LNG from Canada to Asia
is nearly half that from the US. Most LNG exports to Japan
are based on long-term contracts linked to oil prices, which
makes Japanese LNG prices much higher than those in Germany,
the UK and the US.
"We need to import LNG from new suppliers," Kuwano said,
which is why Japan has been been investing in new gas project
s around the world, such as
those in Canada and East Africa, specifically Mozambique.
"This [supply diversification] could also lead to introducing
a new price formula" to lower the price of LNG imports, he
said. "We hope this region [Mozambique] could be a new supply
source for Japan and for the Asian region."
In concluding his speech, Kuwano noted that JOGMEC
successfully completed the world's first offshore methane
hydrates production test in March 2013.
Creating a global gas market in Asia
Domenico Dispenza, the president of The International Group
of LNG Importers (GIIGNL), discussed emerging trade patterns
to Asia. In line with the other panelists, Dispenza confirmed
that buyer and seller negotiations are needed to reduce high
LNG import prices.
Traditionally, in Asia, prices are linked to oil. "Could it
be possible to fix a global spot market price for LNG?" he
posited. Could it also be possible, he asked, to fix a market
price in Asia to create a competitive environment
The next step to create a global gas market in Asia is to
build out the infrastructure, such as pipelines and
terminals. "Markets in Asia are isolated from each other, and
interconnections are needed from country to country,"
especially via pipeline, Dispenza said.
Bridging the gap between buyers and sellers
Lastly, Sheng Chung Lin, the chairman of CPC Corp., spoke
about the Asian gas market transformation. The five major
Asian LNG importersJapan, Korea, China, India
and Taiwanare set to
witness a "shift away from coal and oil, to gas, mainly due
al considerations," Lin
said. Presently, the ratios of primary energy demand in those
countries are 58% coal, 25% oil, 8% gas and 9% other
LNG trade accounted for 10% of global gas consumption in
2012. In the future, "We believe that Asia will be the region
to drive global demand for LNG," he asserted. However, Lin
noted that ensuring lower prices is critical for Asian LNG
Weak bargaining power has led to a high premium for Asian
importers. An unstable LNG pricing mechanism has resulted
from competition between gas and oil, and a lack of
substitute energy sources. Henry Hub prices, however, reflect
gas-to-gas competition in continental regions. Additionally,
destination restrictions in export contracts limit the
liquidity of LNG trade, Lin said. Governments have
taken action to restructure LNG pricing mechanismsi.e.,
Japan's LPCC and Taiwan's Energy Forumalthough
increased LNG import costs are eroding national
competitiveness. LNG pricing plays a pivotal role in
achieving climate change goals and improving economic
strength, he said.
Lin also outlined the differences between buyer and seller
aspirations. Buyers want affordability and flexibility, while
sellers seek profitability and steady sales. For buyers,
massive proposed and new LNG projects may lead to price
competition, and large potential pipeline gas reserves could
become available from Russia, Central Asia, China, and ASEAN
From the seller perspective, LNG demand is growing steadily,
due to environment
al concerns, uncertain
nuclear policies, and increasing applications for vehicle and
bunker fuels. Long-term prices reflect the rising costs of
new LNG projects.
To bridge the gap between buyers and sellers, Lin said the
Asian market must be realigned to match the aspirations of
both sides. He outlined a "3E" program to achieve these
- Expand sources. Buyers must
participate in LNG projects, develop pipeline gas routes,
explore for indigenous gas and diversify supply
- Enhance flexibility. Buyers must
request cost-plus price mechanisms (particularly from US projects), ask for destination
flexibility in contracts and work to establish an Asian LNG
- Enlarge application. Buyers must
increase the use of LNG in vehicle, bunkering and petrochemical
"LNG is the fastest-growing energy source in Asia, but the
LNG price needs to be restructured," Lin said. The chairman
concluded his remarks by saying that he hoped his three-part
proposal would help bridge the negotiation gap between buyers
and sellers and help create a larger, more open and more
prosperous gas market in Asia.