With a projected 2012 import volume of 16 million tons, up from 12 million tons in 2011, China’s LNG demand is strong and expected to grow, according to a partner with Mayer Brown.
However, the country is constrained by the number of coastal LNG import terminals, considering only five such facilities exist now. That number is expected to jump by at least 15 by 2020 when additional planned LNG terminals become operational. When that happens, the country’s import volume would match that of Japan, Toshi Yoshida, a partner with Mayer Brown, said during a Sept. 25 webinar about how LNG is transforming the global energy market.
“Whether or not that is a plausible scenario is still unknown. There are factors that will significantly affect the use and import volume of LNG into China,” Yoshida said. Those factors involve the extent to which China will rely on coal-fired powered generation and nuclear power generation as well as how it will develop domestic shale gas.
If China is able to overcome its technological disadvantages, specifically learning how to implement hydraulic fracturing as part of shale gas operations, such development would significantly impact the country’s natural gas balance and LNG import volumes, he continued. Already, Chinese national oil companies are tapping into the North American knowledge base by gaining US and Canadian shale gas assets to learn more. Success in this area has the potential to send China on the same track as the US, positioning itself to become an exporter of LNG instead of an importer.
Japan remains the largest importer of LNG with 70 million tons imported in 2010.
“Without having domestic hydrocarbon production and being cautious about promoting clean energy, Japan has had LNG as a critical component in its energy source mix,” Yoshida said, noting LNG’s share was as high as 29% -- the same as nuclear -- of the total power generation in 2010.
However, the Fukushima nuclear power plant accident, which prompted the shutdown of all but two of Japan’s 54 nuclear power units for safety or maintenance, has caused a shift from reliance on nuclear to LNG power. Following the accident, LNG import volumes increased 9 million tons to 79 million tons in 2011, Yoshida said.
To help fulfill its future LNG needs, Yoshida said Japan should increase LNG import volumes from existing sources while also tapping new projects. “It is critical the country seeks diversification of supply as well as cheaper LNG prices in order to cope with the public criticism against expensive power prices and also save cash for high maintenance costs or possible abandonment costs of nuclear power facilities,” he added.
Japan already has shown interest in US LNG export projects. For example, Freeport LNG, a Gulf Coast-based LNG regasification terminal in Texas, announced in August that it signed agreements with Japanese power companies Osaka Gas Co. Ltd. and Chubu Electric Power Co. A 20-year agreement with the two companies would cover 100% capacity of the first train of a planned three-train facility capable of liquefying 13 million tons per year of gas.
“Two main reasons for their interests are, first, US LNG prices are much lower or expected to be much lower compared to traditional LNG prices in Japan/Asia,” Yoshida said. “Secondly, imports from the US can mitigate the country’s risk by lowering the reliance on Middle East countries or other countries with higher risk.”
But there is a flipside to doing business with the US.
“Some of US LNG export facilities are designed as tolling facilities, which means LNG buyers will need to secure their own domestic feed-gas supply delivered through pipelines to the liquefaction tolling facilities,” he said. “This is a business model most Japanese companies have not been involved in in the past. Therefore, the management of operations and the risks will be a challenging task for them.”
Japan also may be faced with having to resell LNG purchased from US export terminals to European and Latin American countries.
“In order to do so and cope with unpredictable energy demand in Japan, they will need to secure much flexibility in their shipping arrangements as well,” he noted.
Europe: LNG demand also is predicted to grow in Europe, though it may be weak for the next two or three years, said Stuart McAlpine, a partner with Mayer Brown. Driving the demand will be Japan’s shift from nuclear to gas – sparked by a diversion of imports from Europe to Asia – and declining domestic production.
“Despite the current weaknesses in Europe’s economy, LNG is likely to play a bigger role in the energy mix in the next five to 10 years and that will bring opportunities,” he explained, including for the US to export into Europe, where there are around 30 import terminals funded or planned. “We’ve seen Qatari, Algerian, Nigerian gas, and gas from other locations as well make substantial inroads into the European gas markets in recent years. This has been good for competition but pretty bad for the big producers (such as) Gazprom.”
But Asia is a far more lucrative market and will attract attention in the future, McAlpine said.
Latin America: Uncertainties also lie in the Latin American LNG market, where Argentina, Brazil, Chile, and Mexico lead in LNG import demand.
Areas of concern include whether Argentina, which only recently became a net importer of natural gas, will be able to realize its resource production rate potential to replace all or part of its LNG imports, said Jose Valera, also a partner with Mayer Brown. The big unknown is what will happen with its shale gas resources, considering the country’s technical and economical challenges.
In Brazil, which has plans to bring on a third LNG import terminal, the demand is driven by the electricity generation industry, Valera said, noting demand is low during wet years based on hydroelectric generation. The country’s natural gas production will depend on how well it develops its resources. The country already has proven success with crude oil resources from its presalt regions.
Valera also predicts LNG imports will increase in Chile, where there is a lack of indigenous natural gas. And Mexico, which has three LNG terminals, could benefit from its proximity to the US and take advantage of low prices. But the country also has its own shale gas resources. Depending on how Mexico’s new administration implements energy policy, it could bring reform that could increase development in Mexico.
Contact the author, Velda Addison, at firstname.lastname@example.org.
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