abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Natural gas

Outlook to 2013-14

Suwin Sandu and Alan Copeland

Global demand for natural gas has grown rapidly in recent years and this trend is expected to continue throughout the medium term. The International Energy Agency projects world gas consumption will total 3.5 trillion cubic metres in 2015, an increase of 20 per cent from 2006. The growth in gas demand is expected to be driven by its increasing share of electricity generation and higher consumption in industrial and residential sectors. The increased use of gas within the electricity generation sector reflects its cost-effectiveness against oil, its lower greenhouse gas emissions compared with coal, and community concerns about nuclear power in some countries. In a number of countries, policy priorities which favour gas are based on enhancing energy security and ensuring a diversified fuel mix.

Increased gas demand in some countries will need to be met by imports, either by pipeline or in the form of LNG, because domestic production is insufficient. LNG is going to increase its importance as a source of gas supply, because it allows gas to be transported over longer distances and allows for the diversification of supply compared with gas transported by pipeline.

Natural gas production in Australia has increased steadily over the past two decades to around 44 billion cubic metres in 2007-08. Around half of Australia’s natural gas production is exported. Because of the geographical distance between Australia and other natural gas markets, it can contribute to the global trade in natural gas only in the form of LNG. For this reason the focus of this note is on LNG.

LNG import demand

The world LNG market is characterised by two distinct markets, Asia Pacific and the Atlantic. All of Australia’s LNG exports are delivered to economies in the Asia Pacific, mainly into Japan, the Republic of Korea, Chinese Taipei and China. These countries accounted for more than 60 per cent of world LNG imports in 2008.

In 2008, LNG trade is estimated to have totalled 173 million tonnes, an increase of around 1 per cent from 2007. Imports into the Asia Pacific market are estimated to have increased by 5 per cent to 117 million tonnes, while imports into the Atlantic market (including Europe and Americas) are estimated to have declined by 7 per cent to 56 million tonnes. A key driver of falling Atlantic imports was a decline in US LNG imports (by 52 per cent to 8 million tonnes), reflecting an increase in domestic production of unconventional shale gas.

Asia Pacific imports to grow over the medium term

economic growth results in lower gas consumption growth associated with lower demand for electricity and weaker consumption in industrial sectors. However, growth in imports is projected to increase significantly throughout Asia after 2009, associated with an expected improvement in economic conditions. In addition, climate change policies and uncertainty over nuclear electricity generation are expected to underpin LNG import growth in important markets such as Japan and the Republic of Korea. By 2014, LNG imports into the Asia Pacific region are projected to reach 149 million tonnes, an increase of 4 per cent a year from 2008.

Economic activity is a key driver of Japan’s gas demand. With the economy assumed to contract by 2.5 per cent in 2009, this is expected to result in lower gas consumption, which in turn could result in lower imports of LNG. Around 5 per cent of Japan’s LNG imports are based on spot purchases; hence a decline in LNG imports would initially affect this portion of the market. However, if demand for gas was to fall significantly, the potential exists for reduced imports of shipments under long-term contracts.

Beyond 2009, LNG imports into Japan are projected to grow steadily, supported by government policies aimed at increasing the share of gas in Japan’s energy mix. The Japanese Government has encouraged increased natural gas consumption in the electricity generation sector because it is cost effective compared with oil, has lower greenhouse gas emissions than coal and is more reliable than nuclear power. Over the past five years nuclear generation utilisation has not met planned output levels. A number of maintenance and safety issues have resulted in the shutdown of some reactors. For example, for a large part of 2008, Japan’s nuclear generation sector operated at a utilisation rate of less than 50 per cent.

A large proportion of Japan’s increased LNG imports will be consumed in new gas-fired power stations. In 2008, four new gas-fired power stations were brought into operation with a combined capacity of 2600 megawatts. These power stations could consume the equivalent of 7 million tonnes of LNG if they were to operate at full capacity. In the period between 2009 and 2013 an additional four gas-fired power stations are scheduled to enter operation at a capacity of 5200 megawatts. New capacity includes Tokyo Electric Power Company’s Futtsu (1000 megawatts, 2009) and Kawasaki (500 megawatts, 2013), Chubu Electric’s 1785 megawatts Joetsu plant (2013) and Kansai Electric’s 750 megawatts Sakai-ko power plant (2010).

LNG imports by the Republic of Korea are projected to increase to around 34 million tonnes over the medium term, from 27 million tonnes in 2008. This increase reflects the Republic of Korea Government’s continued emphasis on energy security and environmental considerations. Increased LNG imports will be underpinned by a number of long-term contracts scheduled to commence during the outlook period. Some of these contracts include, 2.2 million tonnes from Indonesia’s Tangguh project, 2 million tonnes from Yemen, 1.5 million tonnes from the Russian Federation’s Sakhalin II project and 0.75 million tonnes from Australia’s North West Shelf project. The increase in LNG demand will be met by several expansion projects of LNG re-gasification terminals currently under construction, including Inchon (8.9 million tonnes a year), Tong Yeong (4.7 million tonnes a year) and Pyeong Taek (3.2 million tonnes a year).

In Chinese Taipei, LNG import demand over the outlook period is projected to be underpinned by increased gas use in the electricity generation and the industrial sector. This increase reflects government policies which encourage gas consumption particularly in the electricity generation sector, because it has lower greenhouse gas emissions than coal. A government policy which allows Independent Power Producers to build only gas-fired and renewable electricity generation capacity could further increase the share of gas in Chinese Taipei’s total electricity generation. In 2009, the Taichung re-gasification terminal is expected to be completed with a capacity of 3 million tonnes a year. Around 1.7 million tonnes a year from this terminal will be supplied to Taipower’s 4300 megawatts Tatan gas-fired power station.

Strong demand growth in developing Asian economies

Over the outlook period, China’s natural gas consumption is projected to increase at an average annual rate of 9 per cent. The forecast growth of gas consumption will be underpinned by increased energy demand associated with economic growth.

China’s increased gas demand will be met by a combination of domestic production and imported gas. Options for importing gas include LNG and via pipeline from its neighbours on the western border, including Turkmenistan and Kazakhstan. Although China has a number of large gas fields, most of them are located in the western part of the country, a considerable distance from the key demand centres in the eastern and coastal regions. The cost of transporting gas several thousand kilometres (either from domestic fields or from Turkmenistan or Kazakhstan) will make LNG imports more competitive as they can be delivered directly to consumption centres. As a result, LNG is projected to be an important source of gas supply over the outlook period.

China imported around 3.3 million tonnes of LNG in 2008. By 2014, LNG imports are projected to reach 13 million tonnes, although up to 17 million tonnes of re-gasification capacity is scheduled to be in operation by the end of the outlook period. A significant proportion of China’s LNG imports will be sourced from Australia, Indonesia, Malaysia and Qatar.

In India, consumption and imports of natural gas are projected to increase over the medium term in association with increased consumption for electricity generation and in the industrial sector. This increased demand will need to be met by increased gas production and gas imports. Gas production from the Krishna-Godavari Basin is expected to start before mid-2009, which will substantially increase domestic gas availability. However, a significant proportion of gas production from the first stage of the Krishna-Godavari Basin has been allocated to fertiliser production and electricity generation plants in Andhra Pradesh, which are currently under utilised because of limited energy availability. In order to meet growing domestic demand, India is expected to increase its LNG imports. The other alternative to importing LNG is to import gas via proposed pipelines from either Iran or Turkmenistan. However, construction of these pipelines is highly unlikely during the outlook period because both would need to be routed through Pakistan, which presents strategic and security challenges for India.

By 2014, India’s LNG imports are projected to increase to around 12 million tonnes from
8.2 million tonnes in 2008. To support the projected increase in imports, India’s LNG import capacity is expected to reach around 19 million tonnes by the end of the outlook period underpinned by the expansion of the Dahej terminal (an increase of 3.5 million tonnes) in 2009 and the operation of the Ratnagiri project (5 million tonnes) in 2011.

Imports of LNG in the Asia Pacific region is also expected to be supported by increasing demand in emerging Asian economies, particularly from early in the next decade. Thailand, Singapore, Philippines and Pakistan have limited energy resources and rely on energy imports. Viet Nam, while currently being energy self-sufficient, could also import LNG to support its proposed expansion of gas-fired electricity generation capacity. In each of these countries, there are plans for LNG imports within the outlook period. However, some of these projects have already experienced delays and it is unclear what effect the assumed weaker economic growth in the region and the availability of credit will have on some of these projects. There is a risk a number of projects will be delayed for an extended period, particularly for projects not yet under construction.

World LNG supply

While the world LNG import market can be split into two regions, there are three broad LNG supply regions: the Asia Pacific, the Atlantic and the Middle East. During the past decade there has been an increasing volume of LNG exports from Atlantic and Middle East sources being imported by Japan, the Republic of Korea, Chinese Taipei and India. This reflects Asia Pacific import requirements exceeding the region’s export capacity. For this reason, supply of LNG to the Asia Pacific needs to be viewed from a global perspective.

Global LNG production capacity at the end of 2008 was around 206 million tonnes, an increase of 8.5 million tonnes. During 2008, two new LNG trains were commissioned, the fifth train at the North West Shelf project in Australia (annual capacity of 4.4 million tonnes) and a sixth train at Nigeria’s NLNG project (4.1 million tonnes).

World LNG supply to increase over the medium term

In 2009, World LNG production capacity could increase by 24 per cent to 255 million tonnes, under the assumption that projects scheduled for completion during the year are completed on time. The increase in LNG production capacity could occur during a year in which demand growth is very weak or even falling. About two-thirds of these additional supplies are located in the Middle East, including Qatar (annual capacity of 23.4 million tonnes) and Yemen (6.8 million tonnes). A significant proportion of the LNG capacity in the Middle East will be supplied to the Atlantic market. Additional capacity scheduled to be completed during 2009 is located in the Asia Pacific region, including the Sakhalin II project in Russia (9.6 million tonnes), the Tangguh project in Indonesia (7.6 million tonnes) and the project to improve efficiency at the existing MLNG Dua plant in Malaysia (an increase of 1.3 million tonnes). LNG production from the Tangguh project will partially offset declining production from the Arun facility, which has been affected by falling natural gas reserves.

Over the medium term, world LNG production capacity could reach 400 million tonnes. Of the new production capacity, around 90 million tonnes are currently under construction (including those scheduled for completion in 2009) and around 105 million tonnes are at a planning stage. However, there is the potential risk that the LNG market could tighten towards the end of the outlook period if there is further delay to the proposed projects as it generally takes about four years from final investment decision to construct LNG project.

Australia’s gas production

Australian gas production (including coal seam methane) in 2008-09 is forecast to increase by 9 per cent to 46.6 billion cubic metres. This reflects production from new gas fields – Angel and Blacktip – which are located off the north-west coast of Australia. Production from the Angel field commenced in October 2008 (annual production capacity of 8.3 billion cubic metres) and is supplied to the North West Shelf’s fifth LNG train. The Blacktip field, with an initial volume of 650 million cubic metres a year of gas, will be mainly used to generate electricity in the Northern Territory, including the Weddell power station.

In 2009-10, Australia’s gas production is forecast to increase by another 9 per cent to 50.7 billion cubic metres. Supporting this increase will be the start up of new gas fields such as Henry (300 million cubic metres) and Longtom (670 million cubic metres) off south-east Australia, as well as Pyreness (620 million cubic metres) off Western Australia. The Angel and Blacktip fields will also produce gas at full capacity. By 2013-14, Australian gas production (including coal seam methane) is projected to reach 74 billion cubic metres, an average annual growth of 10 per cent over the outlook period.

Over the outlook period, coal seam methane is projected to make an important contribution to increasing gas production in Australia. In the first half of the outlook period, increased coal seam methane production will be consumed domestically, mainly for electricity generation. For example, coal seam methane from the Spring Gully and Tallinga fields in Queensland (with a combined annual production capacity of 1.2 billion cubic metres) will be used in Origin Energy’s Darling Downs and Spring Gully power stations. Increased coal seam methane production from the Lacerta (160 million cubic metres) and Fairview (increase of 435 million cubic metres) fields will also be used in power stations in Queensland. A number of coal seam methane projects are also expected to add additional production in New South Wales over the outlook period, including Casino, Camden and Gloucester projects. However, towards the end of the outlook period, coal seam methane is also expected to be converted into LNG.

The growth of the coal seam methane industry in eastern Australia reflects the shift towards the use of gas as a fuel for electricity generation and limited natural gas reserves in the region. The supply of coal seam methane will support the gas consumption in eastern Australia, particularly in New South Wales and Queensland, given the relatively small natural gas reserves.

Australian LNG exports

The global economic downturn is not expected to have a significant effect on Australia’s LNG export volumes in the short-term as the majority is sold under long-term contracts. Australian production and exports of LNG are expected to grow substantially over the outlook period, with increasing production from traditional offshore projects off the north-west coast of Australia as well as projects in Queensland using coal seam methane as a feedstock.

There are a number of LNG projects in Australia under evaluation which could contribute to increased production and exports over the outlook period. Around 13 million tonnes of new LNG projects could come on stream by 2014, out of which around 9 million tonnes could use coal seam methane. However, only one project, Pluto, is currently under construction. Feasibility and design studies are continuing on a number of conventional projects off the north-west coast of Australia (such as Ichthys, Gorgon, Wheatstone, Browse and Pluto’s second train) as well as projects in Queensland based on coal seam methane. Some of these projects are expected to receive final investment decision during 2009 or 2010. Given the four to five years construction timeframe, they are not expected to be in operation until after the outlook period.

In 2008-09, Australia’s LNG exports are forecast to increase by 15 per cent to 17 million tonnes.

This reflects the start up of the fifth processing train at the North West Shelf project in September 2008. Because of technical difficulties, the train is currently operating at around 80 to 90 per cent of its full capacity of 4.4 million tonnes a year. The train is expected to be shutdown for maintenance in September 2009 to enable it to increase its operation to full capacity. In 2009-10, LNG exports are forecast to increase to 18.2 million tonnes.
Australian LNG exports are expected to increase further when Woodside’s Pluto project comes on stream in late 2010. By 2013-14, LNG exports are projected to reach 27 million tonnes supported by production from the North West Shelf and Pluto projects as well as the start up of operation at the Fisherman’s Landing LNG plant (1.5 million tonnes a year) in Queensland.

Although the economic downturn is not expected to affect the volumes of Australia’s LNG exports, it is expected to have an effect on its value at least in the short-term. LNG prices under long-term contracts are usually determined by a formula linked to oil prices. Since the middle of 2008, oil prices have fallen significantly from a peak of US$147 a barrel in July 2008 to about US$40 a barrel in January 2009, and this is expected to result in lower prices for Australian LNG prices. In 2008-09, the value of Australian LNG exports is forecast to be $8 billion. This is projected to grow to $10.8 billion (in 2008-09 dollars) in 2013-14, reflecting increasing export volumes.