OPINION: LNG marketing development, a global perspective, By H. Baharuddin (Part 1)
Thursday, October 17 2002 - 08:47 AM WIB
Editor?s note: Dr. Baharuddin, former Senior Vice President and Director Corporate Affairs of Pertamina, is the architect that is responsible for the success of Indonesian LNG dominating Asia-Pacific market. He was marketing leader for Indonesian LNG for quite a long time and has thorough understanding on Asia Pacific LNG market. He is widely respected in Asia Pacific LNG community as marketer that is able to maintain customer loyalty. His paper, which will be divided into two parts for readers? downloading convenience, appears in Petromindo.Com with Dr. Baharuddin?s permission.
? I have confined my comments primarily to Asia Pacific region, as both LNG supply options and marketing opportunities in the other regions of the world ? particularly in the U. S. ?are developing very fast and, unlike 5 years ago, remind me of a sports saying which goes something like ?you cannot keep track of the players without a big score card?.
? Supply and marketing options are being developed at what I would call a very optimistic rate in these other regions, which also reminds me of the early 70?s, when extremely optimistic forecasts led to prolific over-expansion in the industry. This optimism turned to pessimism when legislation changed the rules of the game and the industry collapsed. Facilities sat idle; companies went out of business. Gloom and doom was the attitude in the early 80?s. But, once again, this pessimism has given way to optimism, as many potential suppliers attempt to monetize their gas reserves in the face of ever increasing projections of gas demand.
? According to forecasts by the U. S. EIA, an agency of the Department of Energy, the world?s natural gas consumption in 2020 is projected to nearly double the 1999 total of 84 TCF, to more than 160 TCF. Natural gas consumption is expected to increase from 23 % of the world?s energy consumption in 1999 to 28 % in 2020. As a result, markets are being courted by many suitors and increasing pressure is being created to change the terms and conditions of the classic LNG Sales and Purchase agreements.
? For us LNG suppliers, one hears again the dreaded cry of a ?buyers market?. I will comment more about this later, but in general I ? for one ? cannot help but feel somewhat uncomfortable with all of the hype that is going on in our worldwide industry. Maybe because it is closer to home, but I feel that our Region is progressing in a bit more orderly manner and believe that ?while a lot of market appetite is being identified, and many potential suppliers are knocking at the buyers? gates ? willing buyers and willing sellers will rationally go forward and mutually enjoy and benefit from the growth that is no doubt there in our markets.
Which leads me to my first question ? what is the market potential in our Region? In a word, good.
Japan
1. Japan is still in the grips of economic recovery and their energy consumption is continuing to decline overall. Crude imports are expected to fall by some 5 to 6 % this year, according to the Bloomberg News Agency, which reflects the slowdown in the economy.
2. Japan?s oil demand has continued to decline since 1994, which not only reflects three economic recessions but also competition in the power generation market as utilities move to cheaper fuel sources, such as natural gas and nuclear power.
3. This trend is expected to continue with Tokyo Gas estimating that LNG demand will increase from 54 mtpa in 2000 to some 70 mtpa by 2010. If it develops, this will be a very significant growth in a mature market but it is coming at a serious price to the suppliers.
4. Even though ?Natural gas is the rising star?, says Katsunori Watanabe, director of research at Nihon Unicom Corp., Tokyo Gas and Tokyo Electric Power Cos. won the biggest gas price cut ever from Malaysia?s Petronas this year as an abundance of natural gas in our Region put pressure on suppliers to reduce prices and agree to more flexible, short-term contracts.
Korea
In South Korea, natural gas demand is expected to grow by 6.6 % from 1999 to 2020. Korea also expects a continued increase in natural gas consumption in the residential and industrial sectors as well as in power generation. Their economic recovery has been faster than Japan?s and their increased fuel consumption reflects this. Korea will continue to be an excellent market for LNG but suppliers can expect that they will seek reduced prices and shorter-term contracts with more flexibility.
Taiwan
1. Taiwan is heavily dependent on imported natural gas, taking more than 95 % of its requirements from overseas. Demand is seen to grow very rapidly as more gas-fired power stations are built, but their market is still relatively small.
2. The Taiwanese are seeking tenders for a 25-year LNG deal to support the construction of eight power-generating units with a total design capacity of 4,000 mega watts. This will require some 4,000,000 tons per year of LNG, depending on gas turbine efficiencies. The LNG tender has drawn wide attention not only because of the size of the contract, but also because the winner of the deal will end a monopoly by state-owned Chinese Petroleum Corporation, which up to now has the only LNG receiving terminal.
3. Taiwan is also the first target of the new ?Energy Bridge? floating LNG regasification technology of El Paso.
Developing Countries
1. The growth of natural gas consumption in developing countries is expected to be significantly greater than in the rest of the world. China and India are expected to contribute most of the estimated 19 % increase in world gas demand from 1999 to 2020, says the U. S. Energy Information Administration.
2. In China, natural gas consumption is now only 3 % of the country?s energy consumption, but it is expected to rise by 10.1 % per year until 2020, thereby increasing its share in China?s energy consumption to about 9 %. With the approval of two LNG import projects for Guangdong and Fujian, and the current development activities for a third import project to Jiangshu, the LNG markets in China are clearly being developed at a rapid rate. Hong Kong is also expected to import about 1 mtpa, starting around 2005.
3. While India represents an enormous potential market for natural gas, and its gas demand is roughly double its current supply capability, a number of factors will restrict supplies to a more modest growth rate of some 6 % a year on a very low base. With the collapse of the Enron Project at Dhabol, LNG imports have been delayed for some time. The British Gas Group is active in trying to develop a Project for Pipavav, but again imports are some ways off Pipeline supplies are also being investigated, but political considerations continue to hamper such developments.
4. The Philippines have also been discussing LNG imports for a long time, but availability of offshore pipeline gas and a geographically diverse market make LNG economics marginal.
Secondly, what effect has all of this talk about expanding gas potential had on our LNG shipping resources? In a word, alarming.
The low prices that have been available for building LNG ships are in serious danger of disappearing as increased orders for ships seek the same number of credited ship yards for construction. In addition, financing resources are being strained, as over 10 billion US dollars are needed just to construct the ships.
1. Potential expansions and announced projects along with the replacement of some older existing vessels, plus the new trend by some Buyers (especially the Japanese utilities) to build And own their own LNG vessels have resulted in a surge in the new LNG vessel order book.
2. At the present time there are 62 LNG vessels on order, of which 10 were ordered this year. Tokyo Gas and Tokyo Electric are building 2 vessels each. Of the 62 vessels, 4 vessels are currently being built for the spot/short term market. Nigerian LNG and Trinidad LNG and their Spanish partners account for some 15 vessels on the order book.
3. The new generation of LNG vessels has seen an increase in capacity from the standard
125,000 cu.mtr to a new average size of 138,000 cu.mtr.
4. There have also been two significant milestones in the LNG Shipping Industry, with Gaz de France building the first diesel-electric powered vessel, and Exmar (Belgian Ship-owner) equipping it?s 4 new vessels with regasification plants to meet the new EP Energy Bridge concept requirements of the charterer, El Paso.
5. There are only 8 shipyards at the present time licensed to build LNG vessels, and the lion?s share of the new building orders is with the Korean yard, Daewoo, with 21 vessels being built or on order. Mitsubishi has 9; Hyundai has 8 and Samsung, 7. Izar of Spain has an order book of 5 LNG carriers, Kawasaki, 6, Mitsui, 5 and Chantiers d? Atlantique, 1.
6. The Woodside Group are currently negotiating with a Chinese yard to build the 2 LNG vessels required for their Chinese project; this will be done in conjunction with an agreement with Chantiers d? Atlantique, due to the fact that the yard only has a temporary Membrane license.
I classified this surge in shipbuilding as alarming, as I believe that once again suppliers and markets may be getting ahead of the market appetite curve with results reminiscent of the 70?s. Only this time, the consequences could be far more serious as much larger commitments are being made by a lot more entities. The current short-term oversupply of ships is assumed to disappear with the development of a long-term healthy backlog of vessels as all of the projects currently being planned are implemented. I hope this time that the world has got it right, but only time will tell.