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Is there a niche for Alaska LNG in Asia? Changes in markets in China, Japan, will play big role, as will changes in Asian LNG pricing, when other big projects come online Kristen Nelson Petroleum News
There is a “huge opportunity” for Alaska North Slope natural gas in the liquefied natural gas market, Mikkal Herberg told the Alaska World Affairs Council Nov. 28.
But, said Herberg, an economist, research director of Asian energy security at the National Bureau of Asian Research and a 20-year veteran of strategic planning with ARCO, it would take “a very strong partnership” between the state and the companies “and some real creativity on costs” to make the project happen.
Herberg said his years with ARCO made him familiar with “the angst and agony that’s gone into trying to find some way to market that 35 tcf of gas up on the North Slope” and he said they spent a lot of time trying to figure out some way to monetize that gas. Until recently, he said, all those plans were built around pipeline projects to the Lower 48.
The development of shale gas in the Lower 48 has changed that, he said, and if Alaska wants to move its gas to Asia as LNG there are a number of supply, price and market uncertainties that the state will need to work through.
LNG critical for Asia LNG is critical for Asia, where gas use has tripled in the last 20 years and is expected to triple again in the next 20 years, Herberg said.
Gas is still underutilized in Asia, about 12 percent of resources compared to 24 percent worldwide.
Why? Because Asia has “a whole bunch of separate markets, separated by huge maritime distances,” which means you can’t move gas by pipeline — it has to be as LNG, “which is a relatively high cost way of moving gas around,” he said.
The advantage of gas for Asia is that it’s a clean fuel, helps balance out the coal consumption and provides energy diversification, allowing the area to move away from both coal and oil.
Herberg said he thinks there are huge prospects for natural gas in Asia, and a lot of that will be in the form of LNG.
“In that sense Alaska has a great opportunity to find a home in that marketplace,” he said.
Dominating the market Asia dominates the global LNG market, accounting for roughly two-thirds of the market, with Japan and Korea both importing all of the natural gas they use.
Asia is an attractive market for new supplies of LNG because the price of LNG in Asia is based on oil, and development of LNG is being driven by “these very high prices that buyers are willing to pay for LNG,” Herberg said.
But the LNG market is changing, with both India and China playing a bigger role in LNG demand in Asia.
The global LNG market is about 240 million tons a year. China’s current 15 million tons of LNG per year is expected to grow to 30 million — or 75 million tons — over the next 15 years, depending on China’s policies, regasification terminal prices and the availability of supplies.
But China potentially has large shale gas resources and if those are developed a lot of potential LNG demand could be backed out, Herberg said.
India and Southeast Asia are also large importers of LNG.
Japan, at 70 million tons, is the largest importer of LNG. The nuclear crisis in Japan meant a huge increase in LNG imports, up to some 85 million tons, creating what Herberg called “a big demand shock in the marketplace over the last two years.”
The question with Japan is whether it will restart its nuclear plants or go to zero nuclear by 2040, shutting down plants as they reach their 30-year lifespan.
Korea is also a large consumer, with consumption expected to grow.
Overall, Herberg said, Asia could grow from 150 million tons to 250 million or even 300 million tons over the next 20 years. It is, he said, “a big market opportunity.”
Growth in supply Qatar, at 80 million tons a year, dominates the supply market, but has established a moratorium on LNG expansion, so supplies from Qatar are expected to be flat.
Indonesia and Malaysia are traditional suppliers, but Indonesia’s exports are declining as domestic gas use grows; Malaysia production is basically flat.
Russia entered the LNG market with Sakhalin II. There are also prospects for a large gas pipeline from Far East Russia to Northeast Asia, but while mega projects have been announced, Herberg said almost nothing has happened to move Russian gas to Asia by pipeline.
Australia is simultaneously working on seven to eight large LNG projects, but the cost structure of projects there is rising and these is a question whether all those projects will go forward.
Then there is the development of shale gas in the U.S., with the possibility of exports ranging from 15 million to 50 million tons to Asia. That depends on decisions being made in Washington, D.C., Herberg said.
It’s an uncertain message for Alaska because the range is so wide and it affects the niche in which Alaska LNG would fit.
There are also huge discoveries off East Africa which would potentially enter the market after 2020 — at about the same time Alaska would be looking to fit its LNG into the market.
Key questions Herberg said he sees a number of uncertainties, things for Alaska to watch.
Most of the near supply, particularly 40-45 million tons of incremental supplies from Australia, is going to become very high priced, he said, because there is just too much demand in Australia for equipment, workers and supplies.
Some of the Australian projects, particularly coalbed methane in Queensland, may not be built, Herberg said.
Then there is oil-linked pricing, developed when LNG development required long-term financing, 25-year contracts, take-or-pay provisions and destination clauses, and is a rigid high-cost pricing structure.
“The Japanese and others are trying to find ways to introduce a more competitive pricing system,” he said, which is why Henry Hub and U.S. supply are critical.
He said there is going to be a lot of pressure on the contract structure and oil-linked prices “and that means probably prices are going to be coming down.”
Herberg said that if a lot of the planned projects come online there is probably ample supply for the next 20 years.
But there is, he said, “a whole lot of uncertainty in all those planned projects.”
There is ample supply, “but uncertainty about whether that supply will come on,” Herberg said.
Key pieces There is uncertainty around some key pieces, he said: China’s consumption of LNG is important to watch, and Japan’s nuclear policy, which will drive an incremental 15 million to 20 million tons.
In the U.S., exporting LNG will be complicated, with lobbying against exporting in favor of domestic gas use. Herberg said his sense is that the U.S. will export LNG, but “a lot less LNG than it would be capable of exporting.”
And a lot of U.S. LNG planning is built on $3 gas, which allows Asian delivery at about $13 per thousand cubic feet. But if U.S. gas prices go to $6-$7, “it’s not going to be necessarily all that competitive.”
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