changing trends in world lng market and cooperation to … · 2020-03-03 · changing trends in...

Changing Trends in World LNG Market and Cooperation to Improve Asian Gas market

국제LNG 시장의변화흐름과아시아가스시장개선 협력

2014. 11. 14

Hyun Jae Doh

KEEI-KPMG 에너지리더과정

Contents�

I. World LNG Market – Growth and Changing Trends

II. Shale Boom and North American LNG Export Potentials

III. Asian Premium and Cooperation to Improve Asian Gas Market

KEEI- 3 -

Global Natural Gas Overview (2013)

Natural Gas Consumption: 3,348 Bcm

- Pipeline imports : 710.6 Bcm (21%), LNG imports : 325.3 Bcm (10%)

Source: IGU(2014)

Natural Gas 23.7%, Oil 32.9%, Coal 30.1% 32.9% 30.1%23.7%

6.7% 4.4% 2.2%

Oil Coal Natural Gas Hydro Nuclear Renewables

(2013)

Source: BP(2014)

Share in World Primary Energy ConsumptionShare in World Primary Energy Consumption

LNG Trade in Global SupplyLNG Trade in Global Supply

KEEI- 4 -

Natural Gas Consumption Share and Trade Flow

▶ North America: Prices linked to Henry Hub (US 22.2%, Canada 3.1%, Mexico 2.5%)

▶ Asia: Oil-linked pricing (China 4.8%, Japan 3.5%, Korea 1.6%, Thailand 1.6%, India 1.5%, Taiwan 0.5%)

▶ W. Europe: Prices linked to alternative fuels (Germany 2.5%, UK 2.2%, Italy 1.9%, Turkey 1.4%,

France 1.3%, Netherlands 1.1%, Spain 0.9%)

▶ FSU (Russia 12.3%, Uzbekistan 1.3%, Ukraine 1.3%)▶ ME (Iran 4.8%, Saudi 3.6%, UAE 2.0%, Qatar 0.8%)

▶ S. America (Argentina 1.4%, Brazil 1.1%, Venezuela 0.9%) ▶ Africa (Egypt 1.5%, Algeria 1.0%)

Source: BP(2014)

KEEI- 5 -

Global LNG Markets: Asia, Europe, North America- LNG share in gas trade expanding: 25.8%(2002) → 31.4%(2013)- Emerging New Markets: Latin America, Middle East, Southeast Asia

Major Trade Flows: Intra Pacific(~ 1/3), Middle East-Pacific(~ 1/3)- Middle East-Atlantic(13%), Intra-Atlantic(8.3%), Atlantic-Pacific(7.8%)

Sources: BP(2014), IGU

LNG Trade Flows

Source: IGU(2014)

< Interregional LNG Trade >

KEEI- 6 -

Global LNG Trade : 236.8 Mt- Non long-term trade: 77.3 Mt (33% of total trade) (GIIGNL: spot & ST trade - 65 Mt, 27% of total trade)

(Demand) Asia accounts for 74.7% of global LNG demand (176.98 Mt)- Europe 14.2%(33.74 Mt), North America 3.6%, Latin America 6.1%, Middle East 1.3%- 104 LNG receiving terminals(total capacity of 721 Mtpa) – 29 importing countries

(Supply) 41% of global LNG trade supplied by the Middle East- Asia Pacific 30%, Africa 15%, Latin America 9%, Russia 5%, Europe 2%- 86 liquefaction trains (total capacity of 290.7 Mtpa) – 17 exporting countries

State of LNG Industry in 2013

Source: GIIGNL(2014)

< 2013 LNG Imports change over 2012 >

KEEI- 7 -

Global LNG Trade- Reached peak of 241.5 Mt in 2011, 236.8 Mt in 2013- Growth in volume(2000~2012 CAGR 7.5%), # of exporters, # of importers

Source: IGU(2014)

Changing Trends in LNG Industry

KEEI- 8 -

Source: IGU(2014)

No. of countries 1990 2002 2010 2013 2020 est.

LNG Exporters 8 12 18 17 ~25

LNG Importers 9 12 24 29 ~40

Source: Ju(2014), GIIGNL(2014)


KEEI- 9 -


Source: IGU(2014)

Non Long-term trade: 77.3 Mt traded on a spot or short-term basis (33% of total LNG trade)(GIIGNL: spot & ST trade - 65 Mt, 27% of total trade)

- Until 2000, less than 5% of volume traded → in 2005, 8% → in 2007~2010, 17~20% Ø growth in LNG contract with destination flexibility Ø increase in # of exporters and importersØ disparity in regional prices → arbitrage

Contents�




KEEI- 11 -

North American LNG Export Projects (Filed)

Source: HIS Energy

KEEI- 12 -

9 LNG projects with a total capacity of 10.56 Bcfd (76Mtpa) approved for non-FTA export- Total FTA export application submitted to DOE: 41.48 Bcfd (40+ applications)- Total non-FTA export application: 38.06 Bcfd

Company Quantity(Bcfd)

Sabine Pass 2.2

Freeport 1.4

Lake Charles 2.0

Cove Point 0.77 (1.0 FTA)

Jordan Cove 0.8 (1.2 FTA)

Cameron 1.7

Freeport Expansion 0.4 (1.4 FTA)

Oregon 1.25

Carib Energy 0.04 (0.03 FTA)

< non-FTA export approved >

Source: US DOE(as of 2014.10. 21)

New US LNG Export Approval Rule(effective ‘14.5.29)

DOE eliminating conditional approval step for non-FTA

- Review licenses after FERC Environmental Approval

☞ Effect of changing the order in the approval queue ☞ Benefits commercially viable projects, which stand later in

the DOE queue (e.g. Sabine Pass T5-6, Golden Pass)

US LNG Project Regulatory Approval Status

DOE updated the study on the effects of US LNG export for capacity of 12 and 20 Bcfd (87 and 146 Mtpa) (2015-2040)

- Previous study on 6 and 12 Bcfd (44 and 87 Mtpa)

- Domestic NG price of 4%(12 Bcfd) to 11%(20 Bcfd)

KEEI- 13 -Source: FERC (updated Oct. 14, 2014)

US LNG Export Terminals – Proposed to FERC

KEEI- 14 -Source: FERC (updated Oct. 14, 2014)

US LNG Export Projects – FERC Approved

KEEI- 15 -

Source: Wood Mackenzie(2014)

US LNG Project Regulatory Approval Status

FERC Queue – by earliest possible authorization date FERC Queue – by earliest possible authorization date

KEEI- 16 -

US LNG Project Peculiarity

Risks Associated with US LNG Imports for TollersRisks Associated with US LNG Imports for TollersCompletion Risk

- Risk of contracted project not built : regulatory, political, local risksSupply Volume Risk - Risk of disruption in supply or failure to arrange supply☞ E&P companies unwilling to sign up a long-term supply – need to develop supply plan Feedgas Costs Risk

- Risk of gas market price(e.g. HH) rising to an uncompetitive level☞ Buyers need ability to ramp down LNG export during cold months with gas price spikes Production Costs Risk

- Risk of gas production cost rising due to environmental, technical challengesPipeline Capacity Risk

- Risk of failing to secure adequate pipeline capacityOther Concerns

- Entry of non-traditional players(independents, MLPs, utilities) into LNG market- Availability of labor and potential for increasing costs and schedule delays

KEEI- 17 -

Conducive to Global Trading activities- US LNG being developed by a

range of developers, supported mostly by traders

- European utilities can leverage PNG and LNG portfolio to capture trading opportunities

- IOCs and Japanese traders can direct LNG to Europe for potential backstop

US LNG Project Peculiarity

< US LNG contracted by off-taker type>

For Asian Buyers, US LNG with flexible terms provides

§ Better position in negotiation & diversified portfolio

§ Eyes towards LNG trading

KEEI- 18 -

West Canadian LNG Projects proposed

Source: Moore et. al.(2014)

3 common sites- Kitimat : Douglas Channel(BC LNG), Kitimat LNG(Chevron), LNG Canada(Shell)- Prince Rupert : Pacific Northwest(Petronas), Prince Rupert LNG(BG)- Grassy Point : Aurora(CNOOC), Woodside

KEEI- 19 -

West Canadian LNG Projects(cont’d)


KEEI- 20 -

Merits : rich resources and proximity- Proximity to demand center(E. Asia)- Supply diversity & low political risk- Possibility of relatively rich LNG- Greater value chain participation

West Canadian LNG Projects – Merits and Challenges


Challenges : deliverability- on time and within budget§ Social license to build:

environmental approvals, support from local stakeholders(First Nations) – LNG sites and pipeline routes

§ Cost overruns and labor shortage : potential competition with oil sands projects

KEEI- 21 -

West Canadian LNG Projects – Merits and Challenges

BC gov’t’s LNG income tax (Oct. 21, 2014)- 1.5% → 3.5% → 5% (2037)

Source: Wood Mackenzie

< US GC vs. Pacific NorthWestLNG Prices (Japan, DES) >

KEEI- 22 -

Global LNG Demand in 2025

Asia Pacific LNG demand expected to take up about 70% of global demand in 2025 - (WM) 237 Mt → ~ 460 Mt in 2025

Ø LNG Demand share(2025): Asia Pacific 71%, Europe 20%, ME 3%, SA 1%

Source: IHS Energy

< LNG Demand Outlook by Region (IHS)>

0

50

100

150

200

250

300

350

400

450

500

2000 2005 2010 2015 2020 2025

SouthAmerica

South &East Africa

NorthAmerica

NorthAfrica

Middle East

Europe

Asia Pacific

< LNG Demand Outlook by Region (WM) >


KEEI- 23 -

Global LNG Supply Potential in 2025

Potential for 650 Mtpa including speculative projects- Atlantic basin 232 Mtpa, ME 99 Mtpa, Pacific 320 Mtpa

Ø North America Potential: 101 Mtpa in 2020, 194 Mtpa in 2025

0

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700

2000

2002

2004

2006

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West Africa

South America

South & EastAfrica

North America

North Africa

Middle East

Europe

Asia Pacific0

100

200

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400

500

600

700

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

Decommissioned

Speculative

Possible

ProbableDevelopment

UnderConstruction

Operational

< Liquefaction Capacity Potential by Region > < Liquefaction Capacity Potential by Status >


KEEI- 24 -

Global LNG Trade Flow in 2025

Contents�




KEEI- 26 -

Crude oil and natural gas price ratio soars- traditionally 6~10: 1 ratio, but since 2009 the ratio soars

WTI/HH ratio

Sources: Bloomberg, The MLG Group

Oil and Gas Price Ratio Surge

< WTI to Henry Hub Price Ratio >

KEEI- 27 -

Regional Price Divergence

Asian LNG import prices pushed to record high Despite their predominance in the global LNG market, Asian buyers pay a substantial premium for their LNG- oil indexation, tight supply market, lack of alternatives and indigenous production, inelastic demands…

☞ Are regional differentials here to stay? What are the measures to alleviate them?

Source: IEA

KEEI- 28 -

1,000 tons

0246810121416

05,00010,00015,00020,00025,00030,00035,00040,000

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Amount of Import

$/MMBTU

400

500

600

700

800

900

1000

Term Contract

$/ton

Korean Recent Term vs. Spot PriceKorean Import Volume and Price

Comparison of Regional Gas Prices

LNG Import Prices

KEEI- 29 -

Stance on Oil Indexation

Asian Buyers Stance

Oil-linked pricing no longer has any rationale- It used to when gas was competing with oil in power sector

Gas supply-demand fundamentals not reflected - Price cannot balance gas demand and supply

☞ Oil Indexation leads to divergence in regional gas prices (Asian Premium)

High capital cost requirement of LNG industry- oil-linked prices required to guarantee a return on large investment

Exploration and development costs are driven by oil pricesLNG prices are tied to alternative fuels such as fuel-oil and diesel

☞ Oil indexation is required to keep it competitive

Suppliers Stance

KEEI- 30 -

Clarifying the Problem Clarifying the Problem l Is the problem the high price level or the price formation?

ü Recent discussions and measures focused on v Changing pricing benchmark index to something other than oil (HH, Hybrid…)v Creating a regional gas hub for a new pricing index in the region

On Asian Gas Premium

- Suppliers contemplating on changing the oil-indexed pricing (Egypt at GECF in 2003, 2004)- Buyers not showing interests

During ‘Buyer’s Market’ situation and when oil price was low

☞ If it is the price formation, what are suitable alternatives?

ü Creating a liquid hub will take time and require other industrial structural changes

☞ If it is the price level, it is a tug-of-war unless the interests are aligned

ü Changing oil-indexation to hub-pricing such as HH can lower the price for nowv What if the oil and gas price ratio changes?v Will the suppliers concede to it? – European renegotiation results suggest…

KEEI- 31 -

energy spot prices2012 dollars per million Btu

Source: EIA, Annual Energy Outlook 2014 Early Release

History Projections

2012

Henry Hub spot price

Brent crude oil spot price

2018 2040

Ratio:7.1

Oil to gas price

ratio:3.4

Ratio:

3.2

EIA projection- US natural gas prices remain well below crude oil prices, but ratio declines

Natural Gas Price Ratio Projection

KEEI- 32 -

0

1

2

3

4

5

6

7

8

9

Mar

14,

201

1M

ay 1

4, 2

011

Jul 1

4, 2

011

Sep

14,

201

1N

ov 1

4, 2

011

Jan

14, 2

012

Mar

14,

201

2M

ay 1

4, 2

012

Jul 1

4, 2

012

Sep

14,

201

2N

ov 1

4, 2

012

Jan

14, 2

013

Mar

14,

201

3M

ay 1

4, 2

013

Jul 1

4, 2

013

Sep

14,

201

3N

ov 1

4, 2

013

Jan

14, 2

014

Mar

14,

201

4M

ay 1

4, 2

014

HH-Indexed vs Oil-Indexed Prices

Source: EIA

Henry Hub Natural Gas Spot Price- Daily price soared to $8.15/mmBtu on Feb. 10, 2014- For monthly average, it reached $6.00/mmBtu in Feb. 2014

KEEI- 33 -

Gas Hub Development and Factors

Gas/LNG Trading

Hub

Gas Supply Infrastructure Connectivity

Many Buyers & Sellers

No Dominant Player(s)

Transparent Price

Formation and

Reporting

Enabling Industry

Regulation & Enforcement

Transparent TPA to

Infrastructure

Source: Holmes(2013, IHS)

Institutional /Structural requirement Japan Korea China Singapore

Hands-off governmentapproach - - - +

Separation of transport & commercial activities - - - +

Wholesale price deregulation + - +/- +

Sufficient network capacityand non-discriminatory

access- - - +

Competitive number of market participants + - + +/-

Involvement of financial institution +/- - - +

< Competitive Market Requirements Comparison >

Source: IEA(2013)

Creating Gas Hub in the RegionCreating Gas Hub in the Regionl Not favorable in all aspects

KEEI- 34 - 34Source: MOTIE, Long-Term Natural Gas Supply and Demand Plans

Domestic Natural Gas Demand Uncertainty

l According to the 11th Long-Term Plan, gas demand for power generation expected to show a free fall, while city gas demand expected to grow üFluctuations and uncertainty of demand in the power sector : gas consumption in the power

sector projected to fluctuate due to cost disadvantage relative to nuclear and coal

KEEI- 35 -

Domestic Natural Gas Demand Forecast Error

l With little cushion in LNG supply, shocks from big errors spread to other customers

(Unit: mill. tons)

ActualLong-term Natural Gas Plans Error Margins

6th 7th 8th 9th 10th 6th 7th 8th 9th 10th

`03 6.47 6.36 1.7%

`04 8.82 7.22 18.1%`05 9.10 6.50 7.61 - - - 28.6% 16.4% - - -`06 10.50 6.73 8.08 - - - 35.9% 23.0% - - -`07 12.08 7.31 8.57 12.22 - - 39.5% 29.1% 1.2% - -`08 11.95 6.23 7.69 12.14 - - 47.9% 35.6% 1.6% - -`09 10.41 4.67 6.65 12.30 12.63 - 55.1% 36.5% 18.2% 21.3% -`10 15.10 4.17 7.35 13.11 14.75 - 72.4% 51.3% 13.2% 2.3% -`11 16.79 4.16 6.99 13.82 15.37 15.35 75.2% 58.4% 17.7% 8.5% 8.6%`12 18.18 4.33 5.87 13.30 15.03 16.30 76.2% 67.7% 26.8% 17.3% 10.3%

`13 20.13 5.62 5.93 13.72 14.49 16.65 72.1% 70.5% 31.8% 28.0% 17.3%

Source: KOGAS (2014)

< Forecast Errors of Gas Demands for Power Generation >

KEEI- 36 -

Need for more flexible Operating Mechanism

High Seasonality & Uncertainty in Demand, and Limited Storage CapacityHigh Seasonality & Uncertainty in Demand, and Limited Storage Capacity

l High demand seasonality requires large storage capacity → reliance on spot cargoes

ü Countries with high swing tend to have higher storage capacity

ü High uncertainty in future demand: demand for gas-fired power generation is highly uncertain

Ø Joint Purchase : a means to bypass the flexibility issue and enhance supply security☞ lessen dependence on spot purchase☞ better utilize storage capacity☞ in itself foster cooperation

- e.g. Kogas & Chubu Electric from Eni (1.7Mt over the period 2013~2017)

KEEI- 37 -

Gas Market Characteristics – Where in the World?

v Limited indigenous gas resources and declining production

v Expectation of increased gas/LNG import dependency

v Gas/LNG imports indexed to oil prices

v Destination and on-sell restrictions for imported gas

v No uniformity in gas industry regulations across individual markets

v Individual markets dominated by national or regional utility monopoliesü High degree or total state-ownershipü Utilities viewed as national championsü Significant employers

v Varying degrees of gas infrastructure connectivity

Excerpts from Holmes, Chris (2013, IHS)

☞ Asia today , …. but could be 1990s Europe

☞ Will things be different for Asian gas market in a decade?

KEEI- 38 -

Factors of Asian Gas PremiumSupply alternatives? - Limited Elastic Demands? - Price insensitiveTrade conducive? - Restrictive and passive

§ Lack of competition, lack of incentive§ Fostering inelasticity in demand§ Over emphasized supply security

Or, Is it ‘Rigidity Penalty’?

The Way Forward

In the mid- to long term, create liquid regional gas market and establish gas hub pricing

In near term, bring in more flexible and hub price-linked volume to alleviate problems of oil linkage

Flexibility issue should be resolved, as it leads to efficient solution through market transactions

Ø Perhaps more problematic than the oil indexed price is the rigidity in trading practice- take-or-pay clause & destination restriction, etc.: … no logical validity☞ hindering efficient development of natural gas market in Asia☞ security of supply threatened with restrictions on trading☞ blocks regional price convergence by preventing arbitrage

Improving Asian Gas Markets

KEEI- 39 -

Measures for Asian Premium and Cooperation for Asian Gas Market

Category Scope Short- to Mid-term Mid- to Long-term

Supply Side Measures

Domestic

• Increase domestic supply• Diversify import sources• Optimize long-term and short-term mix

of imports

• Increase overseas E&P• Build integrated business chain

Regional• Facilitate LNG swaps & joint purchase• Open up upstream sector• E&P technical cooperation

• Cooperate in overseas E&P• Develop joint LNG projects• Build a regional pipeline network

Demand Side Measures

Domestic• Rationalize pricing • Develop alternative power generation

capacity

• Liberalize gas and power and related markets

Regional • Sharing best practices regarding efficiency and pricing policies

• Build a region-wide power grid (other sources of power beyond border)

Trade Side Measures

Domestic• Price deregulation• Easing rigidities in import contracts• Secure more flexible LNG

• Create competitive domestic market

Regional

• Facilitate LNG trade• Share terminals & storage facilities• Efforts to ease contractual rigidities• Enhance data transparency

• Create regional trading platforms• Build a regional pipeline network• Institutional harmonization

KEEI- 40 -

Recent EU Price Renegotiation and Implications

l Changes to more flexibility in pricing and contracting conditions

ü EU companies’ price renegotiation results v With liquid market customers – introduce spot market price indexation v With illiquid market customers – reduce oil indexation level, without spot price

indexation

ü EU competition policy : succeeded elimination of destination clause and more pressurev Recent launching of investigation against Gazprom for hindering competition in

Central/Eastern European gas markets

< Russia LT Oil indexed Price and NBP >

KEEI- 41 -

LNG Market Trends Recap and Bottom Line

Global LNG market is evolving to more short-term oriented and flexible - while long-term contracts still mainstream, non long-term trades rapidly growing - number of importers and exporters continue to increase, naturally leading to more short-term and spot deals, and arbitrage deals

North American LNG can bring considerable impact through flexible contractual terms- no destination restriction, less stringent volume offtake requirement with US LNG- helps increase overall flexibility in LNG supply, breaking away from oil-linked pricing- more flexible LNG supply needs more shipping, more regasification units, and more

parties involved in the market- are we ready for the changing dynamics coming from North America and make best of

the changes to improve Asian gas market?

Korea and other Asian buyers need flexibility in LNG trade for their high seasonality of demand and substantial consumption volumes

- with 3/4 of global LNG trade, Asian buyers should be able to pilot a change to establish trading practice to tailor their needs

- being passive with inelastic demands will get us nowhere in 10 years and on

KEEI- 42 -

Hyun Jae DohKorea Energy Economics [email protected]

changing trends in world lng market and cooperation to … · 2020-03-03 · changing trends in...

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