Hooman Peimani, “LNG development boom in Northeast Asia will lead to price reduction”

May 02, 2016, 07:45 pm

Dr. Hooman Peimani, ResearchFellow at the Asia PacificEnergy Research Centre

The ongoing liquefied natural gas (LNG) development project in Northeast Asia is in danger of going bankrupt from declining imports of the world's three largest LNG importers, Korea, China, and Japan.

Through his opinion piece on AsiaToday on April 25, Dr. Hooman Peimani, Research Fellow at the Asia Pacific Energy Centre, said, "Certain ongoing developments in Northeast Asia will likely result in excessive supply availability and lowering LNG prices in these markets."

"The resulting fall in LNG demand of China, Japan and Korea will certainly shrink the global market," he added.
"Unless substantial alternative demands are found for LNG in addition to the existing ones (mainly for power generation and households) such as for fueling ships, trucks and buses, the mentioned scenario will likely eliminate some of the global LNG exporters through bankruptcies and significantly downsize the remaining ones’ operation," he explained.

The following is the opinion piece by Dr. Hooman Peimani:

Northeast Asia is the world’s single largest LNG consumer as it housesthe three largest LNG importers, Japan, South Korea and China accounting for the bulk of the global demand (nearly 60% in 2014).Unsurprisingly, fluctuations in their consumption have major impacts on the global LNG markets. Within this context, certain ongoing developments in Northeast Asia will likely result in excessive supply availability and lowering LNG prices in these markets.

Japan and Korea account for more than half of the global LNG demand (51.51% in 2014) leaving the rest for China (8.13% in 2014).Needless to say, stability and expansion of this demand is the single determinant for those of the global LNG markets and thus their “health”, meaning the profitability of LNG exports to make them sustainable. Despite expectations to the contrary, shrinking demand due to the availability of alternative energy is in sight to prompt a progressively lowering of the regional LNG demand in the foreseeable future after peaking in this decade while generation capacity is expanding.

LNG imports accounts for 100% of Japan’s and Korea’s gas imports (respectively, 120.6 billion cubic meters [bcm] and 51.1 bcm in 2014) and, in fact, supplies as both are poor in fossil energy. For geographical reasons, piped gas imports are currently not an option to totally depend them on LNG.

However, importing piped gas from Russia, a regional country and a global LNG supplier, is technically possible through an offshore pipeline from the Sakhalin Island, in the case of Japan, and via North Korea, in the case of South Korea. Yet, their respective proposed projects are pending the settlement of political (Japan-Russia) and security (South Korea-North Korea) issues to makepiped gas imports only a potential option for these countries in an unpredictable future.

In absence of such imports, nuclear energy can and will certainly decrease Japan’s and South Korea’sLNG demand.Japan’s shutting down of its entire nuclear power plants in reaction to the Fukushima accident deprived it of 30% of its power generation. It has since expanded its reliance on fossil fuel-power generators to compensate the loss only to phenomenally expand its imports of their fuels especially gas, which registered an increase of almost 26%in 2014 over its 2011imports.

Apart from its unsustainability for environmental reasons (growing CO2 emissions), such reliance is not sustainable for its economic consequences (increasing power generation cost and Japan’s vulnerability to fuel supply disruptions) with their negative impact on the Japanese economy struggling to overcome its mainly poor performance since the 1991 bubble burst. The well-publicized, but less-materialized, idea of replacing nuclear energy with renewables (mainly solar and wind)is not feasible. As intermittent source of power, they require fossil fuel-fired generators to fill the gap caused by their fluctuating power generation for natural reasons (lack of or weak sun beams and absence of suitable wind).

For this matter, Japan’s new energy policy of July 2015 provides for nuclear energy a share of 18-22% by 2030 in its power mix. In its aftermath, Kyushu Electric Power Co. restarted its two 846-MW PWR reactors in Kagoshima Prefecture on 11 August 2015 (Sendai 1) and 15 October 2015 (Sendai 2). Many of the remaining 40 operable reactors(38, 250 MW) will be reactivated once passing safety tests of which 23 are in the process of restart approvals.

While the exact number of such reactors and their date of reactivation are currently unknown, it is certain that Japan’s LNG demand will decrease substantially as every 1000 MW of nuclear energy replace 1,000,000 tons of LNG.

For the same reason, South Korea’s expanding nuclear power energy to increase its generation capacity from 23,000 MW in 2016 to 36,000 MW in 2029 will reduce its need for LNG.

In the case of China, its expanding nuclear sector, the world’s fastest growing one, will not significantly affect its LNG demand in the near future as it is meant to firstly replace China’s highly pollutive coal-fired power generators. Rather, the country’s rapidly expanding piped gas imports has the potential to replace even its entire LNG imports should it so decide. However, Beijing could choose to import an unpredictable volume of LNG as a means for avoiding over-dependence on piped imports and generating a back-up capacity in case of unforeseeable events.

China’s LNG imports (27.1 bcm in 2014) accounts for 46% of its total gas imports (about 31% of its demand)leaving the rest (31.3 bcm) for piped gas of which its bulk comes from neighbouring Central Asia through the Central Asian Gas Pipeline. The pipeline’s completion in 2018 will enable China to import annually 85 bcm of gas mainly from Turkmenistan, but also Uzbekistan and Kazakhstan. In the same year, the under-construction EastRoute Gas Pipeline will start supplying China with 38 bcm of Russian gas yearly. The already in operation Myanmar-China Gas Pipeline with its yet-to-reach capacity of 12 bcm per annum of Myanmar’s oil-associated gas will avail more piped gas to China.

China’s extensive efforts to increase its own conventional and unconventional (especially coal-bed methane) gas production (134.5 bcm; around 70% of its demand in 2014) will further reduce its need for LNG (14.6% of its demand).

The resulting fall in LNG demand of China, Japan and Korea will certainly shrink the global market as LNG imports by the world’s fourth (India; 18.9 bcm) and fifth (Taiwan; 18.1 bcm)largest importers with their respective global shares of 5.67% and 5.43%(2014) could not possibly expand large enough to cover the difference. In fact, India’s growing gas demand could well be mainly or even completely satisfied with piped gas as one of the existing projects will likely become a reality in the predictable future. These are the revived Iran-Pakistan Pipeline to which India can join as was the plan initially or, less likely,the Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline whose realization faces major security challenges for its passing through Afghanistan.

Taiwan’s possible change of its anti-nuclear energy policy (resulting in a halt in completing its Lungmen 1 & 2 reactors and a plan to phase out the operating six reactors) for financial and environmental reasons and its expanding renewable power generation capacity could potentially curtail or limit the growth of its LNG demand.

The growing availability of mainly Russian, but also Azeri piped gas to the European and Eurasian LNG importers (with combined global share of 15.63% in 2014) and the increasingly conceivable project of Iranian piped gas exports to Europe (thanks to its recent nuclear agreement) will certainly decrease their future LNG demand.

Against this background, the ongoing projects, mainly in the Asia-Pacific region, to raise by 100 million tons the existing LNG export capacity by 2018 added to other capacity building projects of new and aspiring exporters (e.g., Canada, USA, Iran and East Timor) will funnel a huge amount of extra LNG into the shrinking global markets thanks to the increasing availability of cheaper conventional and unconventional piped gas.

The rise of surprising potential gas (piped and LNG) exporters (e.g., Cuba and Israel) will further add supplies to the already saturated gas markets, whose prices have been on a free-fall in this decade.

In conclusion, the mentioned developments will certainly increase the availability of both piped gas and LNG to ensure their low and, most probably, lowering prices while resulting in a large and expanding under-utilized LNG production capacity.

Unless substantial alternative demands are found for LNG in addition to the existing ones (mainly for power generation and households) such as for fueling ships, trucks and buses, the mentioned scenario will likely eliminate some of the global LNG exporters through bankruptcies and significantly downsize the remaining ones’ operation.

#Hooman Peimani #Asia Pacific Energy Research Centre #LNG development #importer #Korea