Wood Mackenzie has challenged the prevailing view that structural shortfalls will invariably drive demand for liquefied natural gas (LNG) in the Far East. The global energy analyst has warned that regulatory and energy policy uncertainties in both Japan and South Korea could result in less LNG supply being developed. However, there's a range of variables at play - not least the US domestic gas glut - that will have a major bearing on the global supply/demand balance, and subsequent pricing, between now and the end of the decade.
The Wood Mackenzie conjecture is based on the view that the energy policies of both countries have become increasingly difficult to assess - a problem both for end-users and suppliers. Politicians and industrialists in both countries are actively pushing for greater competition between the region's LNG suppliers in a bid to hold long-term prices in check. But there is a danger that energy policy could become muddled, in the short term at least, because of the conflict between increased liberalisation of energy markets and regional opinion over nuclear power generation, post Fukushima. Japan has just suspended activities at all of its remaining reactors.
The 'Asian premium'
The desire to bring down LNG prices in the region is understandable given that they're substantially higher than those of other major consuming regions such as North America - or even Europe, for that matter. Indeed, Japan and India are putting together an LNG importers' cartel in a bid to shrink the so-called 'Asian premium' and diversify their import channels - a reflection of the need for economies in the region to act in concert if meaningful long-term price cuts are to be achieved. But Wood Mackenzie analysts argue that a lack of clarity in energy policy could increase the cost of LNG procurement, resulting in distributors in Japan and South Korea buying the minimum quantity of LNG needed. A lack of clarity could certainly act as a disincentive for companies contemplating energy projects with substantial lead times towards production.
As the two countries currently account for more than half of global LNG demand, any prolonged regulatory uncertainty that stifles regional demand will have a material impact on UK oil and gas companies operating in the sector - many of which have driven capital expenditure to unprecedented levels in a bid to secure global market share.
BG Group (BG.), for example, intends to become the world's biggest supplier of LNG, and has recently been looking at purchasing fields in Canada that could supply a proposed LNG plant in British Columbia to ship the fuel to Asia. It has already agreed to build an 850 kilometre pipeline with Spectra Energy Corp to pump gas to the facility and is looking to secure more resources. It comes as Alaska's Department of Natural Resources and the Japan Bank for International Cooperation signed a memorandum to explore ways that natural gas from the state might be developed and exported to Japan. It seems everyone's at it.
The Oz supply train
BG is confident that there is sufficient forward demand to absorb additional LNG supply coming on-stream, but it's not a view that's universally shared within the industry. US major ConocoPhillips has warned that the scale of expansion from plants in Australia, Europe, North America and Africa could conceivably result in supply outstripping demand by 2020. The latest edition of Douglas-Westwood's World LNG Market Forecast states that global capital expenditure will reach $228bn (£143bn) through 2013-17 - an increase of 109 per cent over the preceding five years - so the warning by ConocoPhillips might not be that far off the mark.
Much will depend on whether all of the $190bn of LNG projects in Australia eventually see the light of day - and the portents are mixed. Local player Woodside [Petroleum] recently canned a $45bn onshore development proposal in Western Australia, but Royal Dutch Shell (RDSB) is pressing ahead with the 2017 launch of the world's first floating LNG plant, Prelude LNG, in waters off Australia. Meanwhile, BG has pushed the expansion of its $21bn Queensland Curtis LNG plant further down the list of its priorities, instead targeting approvals for two North American LNG projects and one in Tanzania.
Earlier this year, global resource heavyweights Exxon Mobil and BHP Billiton (BLT) announced plans to build the world's biggest floating LNG processing and export plant off the north-west coast of the country. The facility would increase Australia's current LNG production by around 30 per cent, producing 6m-7m metric tonnes per annum (mmtpa). Prelude is expected to cost in the range of $11bn-$12.6bn, and the proposed Scarborough LNG $18bn-$24bn - even for global majors, this spells commitment.
Washington eases restrictions
And now there's another issue for producers who have invested heavily 'down under' in a bid to tap into Asia's energy deficit. The Obama administration, which issues export licences required under US law, has sanctioned the development of a fourth US LNG export terminal to supply Asia's big end-users. This takes the level of approved exports from Uncle Sam's overflowing gas complex to about 10 per cent of current US output, although there's another 20 applications in the pipeline. Despite protestations from US industry, Washington appears to have taken the decision to export a much higher proportion of its burgeoning shale gas resources than originally anticipated.
IC VIEW:
Given the disparity between 'Henry Hub' prices and those in Asia, the roll-out of US exports would present a fundamental challenge to conventional pricing models, where big-ticket capital projects have traditionally necessitated long-term off-take agreements. Put simply - and in keeping with the Wood Mackenzie view - Asian buyers will invariably become ever more price sensitive if US exports reach a substantive level. The hope, certainly from the perspective of end-users and even many producers, is that the development of large-scale LNG export facilities across several regions could precipitate long-overdue convergence in global pricing.
