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Natural gas's new global
role
By Jamie Miyazaki
Natural gas is beginning to alter the world's
energy order as global business switches from
traditional sources such as coal and oil to natural gas,
with new liquefied natural gas (LNG) terminals springing
up, especially across Asia, scores of new ships being
built and new companies coming into existence.
This insight has certainly not passed unnoticed
by the world's energy companies, which have watched the
global natural-gas market grow a solid 3 percent
annually recently, while LNG soared by a very healthy 8
percent in the first half of 2003. Demand for natural
gas in Asia is likely to grow by about 4 percent a year
for the next 30 years, much faster than in the rest of
the world, requiring the creation of pipeline
infrastructure on a large scale, according to statements
at the 22nd World Gas Conference in June.
Asia's
share of global consumption has risen from just 2
percent in 1960 to 12 percent today and should reach 19
percent by 2030, according to Kunio Anzai, chairman of
the Japan Gas Association, with growth in demand
particularly strong in Japan. Gas, Anzai said, is a
rapidly growing priority area in the Japanese
government's energy policy, with natural-gas demand
expected to grow steadily and to "continue to play a
role as a volume-growth driver of [gas consumption in]
the Asian region".
This is not to say that the
oil satraps of the Middle East and Southeast Asia are
going to lose their influence soon. Much of natural gas
accompanies oil. Nonetheless, traditionally oil
companies have not viewed natural gas as an important
revenue source. Striking gas was even viewed as a
hindrance to core operations of getting the black stuff
out of the ground as fast as possible, with lots of
natural gas being flared off at the wellhead.
But, as Sheikh Ahmed Zaki Yamani, the former
Saudi oil minister, famously said in reference to oil's
hold over policymakers' minds: "The Stone Age did not
end for lack of stone, and the oil age will end long
before the world runs out of oil."
As the world
switches to gas-powered electricity generation,
natural-gas demand is expected to continue rising faster
than for other hydrocarbons. Mitsui's planned production
alone of LNG is expected to more than double in the next
15 years. Royal Dutch Shell has gone as far as
predicting that by 2025 gas demand could outstrip that
for oil.
Gas has traditionally been transported
either by pipeline or liquefied and shipped by tanker.
Pipelines, despite the large initial costs of their
construction, are the cheapest means of transporting
gas. Unfortunately, because many gas fields are so
remote from their core markets, not much gas is left
that can be effectively transported by pipeline.
That has meant a renewed interest in shipping
LNG by tanker and, for instance, has made the formerly
lackluster state-owned shipping company Malaysian
International Shipping Co Bhd into an equities market
star. MISC, a 62.4 percent subsidiary of the Malaysian
national oil company Petronas, skyrocketed over the past
half-dozen years to become the world's single largest
owner and operator of LNG tankers, with a fleet capacity
of 13. MISC has ordered six more new LNG tankers to be
delivered on a staggered basis before March 2005.
Thanks to economies of scale and new technology,
LNG's capital costs have plunged by more than a quarter
over the past decade, with shipped LNG now competitive
with piped gas over anything more than 2,000 kilometers.
Obviously, oceans make pipelines problematic. With the
major LNG markets in Northeast Asia far from the main
gas fields of Borneo, Australia and Qatar, LNG remains
the favored method of transporting gas to the consumer
nations. Moreover, a lot of the current and future
production growth is not in the Middle East but,
significantly for Asian nations, in Central Asia,
Australia and Russia.
In much the same way that
the United States dominates the oil market, the
economies of Japan, South Korea and Taiwan dominate the
LNG market, although today, according to the University
of Houston Law Center's Institute for Energy, Law and
Enterprise, the US has the largest number of LNG
facilities in the world, scattered throughout the
country and located near population centers. Piped
residential use of natural gas in the US has been
extensive for decades.
Nonetheless, Japan alone
now accounts for some 53 percent of global demand, with
the bulk coming from its power companies. China as usual
is the new kid on the block and expects to be the next
big growth market. Weng Shilie, head of directors with
the Shanghai Municipal Energy Research Society and a
member of the Chinese Academy of Engineering, said
recently that China's installed capacity in natural-gas
electricity generation can be expected to increase from
319 million kilowatts in 2000 to 960 mm kW by 2020 as it
looks to diversify beyond its reliance on coal
generators.
Demand for LNG in Asia should double
to more than 150 million tonnes by 2015 on surging
demand from Northeast Asia. China's LNG needs alone are
expected to double from 10 million tonnes annually in
2001 to 20 million by 2015. Beijing recently contracted
for 3 million tonnes of LNG a year from Australia's
North West Shelf field. It is hurriedly building a big
new LNG terminal in Guangdong to cater for this.
New LNG terminals are also springing up across
the Asian region. Japan is constructing two more LNG
terminals, with another two on the drawing boards, and
both South Korea and Taiwan are in the midst of
constructing extra terminals.
Most of Japan's
gas is supplied from the Asia-Pacific region, primarily
Indonesia, which accounts for about 30 percent of its
LNG imports, and Australia, which accounts for 13
percent. Malaysia is set to become the world's
second-largest producer of LNG with the completion of
Petronas' third LNG plant in Bintulu, Sarawak. However,
Japan's new focus is on Russia, which has the world's
largest natural-gas reserves - an estimated 40 percent
of the recoverable natural gas on the planet.
Other than these, Japan's main area of
involvement in Russia's gas market is at Sakhalin, the
960-kilometer-long island in Russia's Far East, 43km
north of Japan. Sakhalin's 20,000-square-kilometer
offshore shelf contains an estimated 2.5 trillion cubic
meters of natural gas, a veritable hydrocarbon Valhalla.
Some analysts say the gas reserves east of Sakhalin
could approach those of the North Sea.
The
energy companies involved in developing the various
projects under way at Sakhalin are hoping to produce
enough gas to satisfy up to 28 percent of Japan's annual
natural-gas imports. Since May, Tokyo Gas, Tokyo
Electric Power and Kyushu Electric Power have concluded
separate basic agreements with Sakhalin Energy
Investment to purchase LNG from a gas field in the
Sakhalin II Project, next to the Chayvo oilfield. LNG
supplies to Japan will begin in 2007 and will be carried
out over the next 22-25 years.
All this interest
in LNG across Northeast Asia has heralded a construction
bonanza not just for new terminals but also for the
builders of special LNG carrier ships. Last year saw a
record 58 ships on order, and there is a three-year time
lag time for new orders. New LNG carriers don't come
cheap either, with prices in the US$170 million region.
The Japanese and Korean shipyards that are the main
producers are over the moon.
This can be touchy.
Despite the fact that LNG tankers are potential floating
bombs of a magnitude generally reserved for nuclear
fission, there has never been an accident in about 40
years of LNG shipping. The one major accident involving
LNG occurred in the US city of Cleveland in 1944 when a
storage tank failed. The LNG that escaped from the tank
formed a dense cloud in the surrounding neighborhood and
seeped into the sewers. The resultant explosion killed
128 people.
That is because natural gas is
cooled to minus 160 degrees Celsius before being piped
aboard the tankers. At minus 110 degrees C, it becomes
lighter than air and in effect boils. If an LNG tanker
were to ignite, the resulting explosion would devastate
everything in a radius calibrated in miles. For that
reason, transfer facilities are located far from
populated areas and handled very gingerly.
Ironically, all this demand for LNG is unlikely
to result in a massive spike in its price. Rising demand
has resulted in fiercer competition on the supply side,
lowering prices and margins. Both Sakhalin II's price
offers to its Japanese customers and Australia's deal
with China offered discounts of up to 30 percent over
other contracts. Price competition in Asia is likely to
intensify further once Sakhalin I, the island's other
energy project, constructs a gas pipeline either to
Japan or China. A further pipeline proposed from Irkutsk
in Russia to supply the Chinese and South Korean markets
could put additional pressure on the rigid contracting
policies involved with LNG.
The recent
construction bonanza in LNG carriers has also been
unusual in that nearly 40 percent of new orders aren't
linked to a specific project, suggesting a high level of
speculation. Traditionally, LNG contracts have been long
term-ventures. An increase in supply coupled with excess
carrier capacity could fuel a spot market in LNG,
further depressing prices. Throw in the deregulation and
liberalization of power markets under way across Asia,
which should improve pricing and contract terms in favor
of buyers, and LNG looks set to be a buyer's market for
the time being.
Consumer nations are already
starting to ask for shorter contracts and increased
flexibility. Many of Indonesia's contracts with Japan
are set to expire in 2010, and Japan is looking for more
competitive terms and conditions. With stiff competition
coming from other LNG producers, Indonesia may have to
acquiesce to Japan's demands, as it is unlikely to be
able to forsake the billions of dollars in revenue if
these agreements are not extended. In a telling sign of
the competition in the Asian natural-gas market, as LNG
prices fall, three Japanese gas utilities recently
announced a cut in charges to their customers.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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