Asia’s golden age of gas isn’t assured

KUALA LUMPUR: If natural gas really is to be the fuel of the 21st century, it’s clear that the demand growth has to come mainly from Asia, but this isn’t quite as certain as the industry may assume.
Attending the World Gas Conference in Malaysia’s capital gives the impression that gas is indeed the answer to most of the world’s future energy needs.
It’s cleaner than oil and coal, cheaper than renewables, safer than nuclear and abundant across the globe, especially given the rapid growth in so-called unconventional forms from shale rock in the US and coal seams in Australia.
The International Gas Union, organizers of the conference, believe gas can account for about a third of primary energy by 2050, up from one-fifth currently.
The International Energy Agency, in a report released recently, said it expects global gas demand to rise 17 percent to 3,937 billion cubic meters in 2017, with China more than doubling its consumption to 273 billion cubic meters.
And it’s not just China, gas demand will rise in India and across Southeast Asia as nations including traditional gas exporters such as Malaysia turn to importing the fuel.
However, amidst this bullish scenario for gas there seems to be one thing that is discussed very little by the industry. Cost.
Put simply, gas is expensive in Asia, double that of Europe and about eight times the cost in the US.
While gas demand will rise with economic growth in Asia, it’s hard to see how it can displace much coal and oil while it remains the most expensive of the fossil fuels.
It’s also difficult to imagine how gas can become the fuel of Asia’s future when there is a tiny tradable market, the bulk of contracts are long-term liquefied natural gas agreements linked to the price of crude and there is virtually no pipeline connections between consuming nations that could facilitate trade and market development.
Asia’s developed gas markets in Japan, South Korea and Taiwan are mainly served by LNG based on oil-indexed contracts.
While these do much to guarantee supply for utilities, they do very little to create a competitive market for end-users.
There is an almost cosy relationship between producers and buyers, with the oil-linked contracts of up to 25 years providing the capital certainty needed to justify the billions of dollars needed to build LNG projects.
But this has also served to ensure that gas, far from being a fuel of choice, remains almost a luxury source of energy.
While coal has been traditionally cheaper, the gap had been closing in recent years as coal supply in Asia tightened with China shifting to being a net importer in 2009.
However, coal prices have slid this year while LNG prices have surged since the Fukushima nuclear crisis in Japan last year, which boosted demand from the country following the shutdown of nuclear generation.
And LNG has also now lost its advantage over crude oil, with JPMorgan calculating that spot LNG prices in Asia are at the oil equivalent of about $105 a barrel.
Given that Brent crude is now below $100, this means that at the margin it may be more economical for Japanese utilities to burn crude or fuel oil than LNG.
Spot LNG prices in Asia are around $18 per million British thermal units, having almost doubled since the start of 2011, while US prices are about $2.45 per mmbtu, having almost halved since the beginning of last year.
The US is having a genuine gas revolution, with the abundance of shale output meaning gas is displacing coal in power generation.
But for this revolution to spread beyond North America, gas markets and prices will have to undergo similar changes in Asia.
While there is the potential for shale to underpin an expansion of supply in China, the likelihood for the next decade is that LNG will continue to meet most of the demand, as well as pipeline supplies from Russia and other nations in the Caspian region.
And for the LNG capacity to be built, both the project developers and the customers will want guarantees that make a move away from oil-indexing unlikely.
It will take the arrival of new supplies in Asia to force the changes and make gas step out from behind the oil linkage.
These new supplies could be from the west coasts of Canada and the US, from shale discoveries, from pipelines from the former Soviet Union and from frontier provinces such as East Africa.
But none of this will happen quickly, meaning the hopes of the gas industry for their fuel to become the premier choice in Asia will likely take more time to be realized.
For the IEA’s “golden age of gas” to be more than just a snappy catch phrase in Asia, the industry and its partners in governments and end-users has to work toward integrating Asia into a global gas market, with more short-term pricing and trading in a market that stands on its own two feet, out of the shadow of oil-indexing.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.