Asians favour LNG to pipeline gas

Asia's booming gas demand growth will provide viable markets for producers on Russia's Far Eastern island of Sakhalin but buyers are likely to favour liquefied natural gas (LNG) over pipeline supplies in the medium term, a senior Japanese executive was quoted by Reuters Tuesday.

Shigeru Muraki, General Manager for Gas Resources Development at Tokyo Gas said LNG was a familiar option for Japan and other neighbouring Asian consumers.

"We studied the possibilities of both LNG and pipeline supply and found that LNG would be extremely competitive because of the short transportation distance and our past experience," Muraki told a conference on Sakhalin energy in London.

"For the future we are studying pipeline gas but for now we decided on LNG."

Tokyo Gas in May became the first Asian buyer to ink a long-term gas deal with Russia, undertaking to buy 1.1 million tonnes of LNG a year for 24 years from the Sakhalin-2 project, led by Royal Dutch/Shell.

The sale to Tokyo Gas was followed by two other deals, giving a huge fillip to Sakhalin-2 and allowing it to proceed with building one of the world's largest LNG production facilities.

"For the region as a whole, LNG will continue to play a major role but I expect that pipeline gas supply will also emerge in the next 10-15 years," Muraki said. "The consensus has been...LNG first and pipeline later."

While the Asians' preference for LNG has allowed Sakhalin-2 to proceed with gas investment, the rival Exxon Mobil-led Sakhalin-1, which aims to build a gas pipeline to Japan is yet to snare buyers.

It said earlier this year it would miss its 2008 target to start exports. It had planned a $900 million link by that date that would ship 28 million cubic metres a day of gas to Japan.

Analysts say the project was always an ambitious one as it aimed to create a piped gas market in a country geared towards LNG. Japan also lacks a national distribution grid into which the pipeline could hook up and observers say Sakhalin-1 may have to shift focus to China or South Korea.

Muraki said Asian buyers such as Japan, South Korea and Taiwan had three decades of experience with LNG but were unfamiliar with pipeline gas. Japan, South Korea and Taiwan import 70 percent of the world's LNG and China is set to soon enter the market in a big way.

"Time is needed to resolve several critical issues with pipeline gas," Muraki said, citing compensation for fisheries disturbed by a sub-sea pipeline, uncertainties over pipeline ownership and unresolved Russo-Japanese maritime boundary issues dating back to World War Two.

He said other issues to be tackled included a regional framework to share pipeline infrastructure and pricing issues for the pipeline gas.

"With pipeline gas, supply source diversity is extremely limited. Also storage will be needed to meet demand fluctuation," Muraki said. "On the other hand we have been importing LNG for 30 years and we have enough LNG storage tanks."

"But if pipeline gas and LNG will compete in the beginning for some years, they will ultimately complement each other to supply the region."

Muraki said ultimately the projects' progress would hinge on how fast gas demand would grow in the region.

"Natural gas will play an important role in diversifying energy supply mix and supply sources," he said, noting that gas's share in Japan's energy mix was about 10 percent, half the world average.

"Slow development of nuclear and renewable energy gives an advantage to gas," he added.

Muraki said Tokyo Gas forecast Japanese gas demand to grow by 2.7 percent annually, reaching 110 billion cubic metres (bcm) a year by 2015 from 77 bcm last year.

"A 20 percent share in the energy mix will be achieved by 2015," he said.

Chinese and South Korean consumption are growing by 8.4 percent and 5.2 percent respectively, according to data from the Asia Pacific Economic Cooperation (APEC).

However Muraki said the large number of aspiring LNG suppliers including Indonesian, Malaysian and Australian projects, could in future see many projects chasing a few buyers. Falling production costs and cheaper LNG vessels were likely to compound the situation, he added.

"I think we could see a situation of excess supply in the next decade when some projects are left with unsold volumes and this could help an LNG open market emerge," Muraki said. "But this will be limited to 10-20 percent of the total market volume." (*)