Changing Landscape of LNG Business in the APEC Region

APEC Workshop on APEC Energy FutureUlsan, Korea

22 August 2005

Yonghun Jung, Ph.DVice President

Asia Pacific Energy Research Centre, Tokyo

Table of Contents• An Outlook of Natural Gas

– APEC Energy Demand and Supply Outlook

• Drivers for Natural Gas– Ease of use, clean, and market development

• LNG and PNG– LNG is preferred choice

• LNG Developments– LNG Outlook– Supply and Demand– Flexibility

• Barriers for LNG Developments– Economic, Financial and Regulatory Barriers

Total Primary Energy Supply in APEC (1980-2020)

Source: APERC (2002), “APEC Energy Demand and Supply Outlook 2002”

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1980 1990 1999 2010 2020

Mtoe

Oil Coal Gas Hydro Nuclear New and Renewables

Oil 2.1% p.a.

Coal 2.1% p.a.

Natural Gas 2.6 % p.a.

Hydro 2.7 % p.a.

Nuclear 1.7 % p.a.

NRE 1.1 % p.a.

TPES growing at an annual rate of 2.1 percent (1999-2020)

Outlook for Natural Gas by Region(1980-2020)

Source: APERC (2002), “APEC Energy Demand and Supply Outlook 2002”

Note: IEA data for Viet Nam is available from 1986 onwards and Russian data is available from 1992 onwards, hence these are respectively included from 1990 and 1999 onwards.

0

500

1000

1500

2000

2500

1980 1990 1999 2010 2020

Mto

e

North America Latin America Northeast AsiaSoutheast Asia Oceania ChinaRussia

1980-1999 1999-2020Russia 2.0%China 4.2% 8.3%Oceania 5.6% 2.6%Southeast Asia 10.7% 3.9%Northeast Asia 7.2% 3.3%Latin America 3.1% 6.3%North America 0.7% 1.8%

Annual Growth Rate of Natural Gas by

Region

Natural Gas: Incremental Growth by Sector and Region

(1999-2020)

0

100

200

300

400

500

600

Powergeneration

Industry Transport Commercial Residential

Mtoe

Oceania

2%

Russia19%

North America34%

LatinAmerica

12%NortheastAsia10%

SoutheastAsia9%

China14%

Source: APERC (2002), “APEC Energy Demand and Supply Outlook 2002”

North America, Russia and China absorb two-thirds

Power sector will drive natural gas demand growth

Why Natural Gas?

• Easy to use• Clean

– Neither SOx, nor NOx– Urbanization

• Mature market– Competitive price– Many sellers and many buyers

Two Modes of Transportation

• LNG (Liquefied Natural Gas) and PNG (Pipeline Natural Gas)

• Determining Factors– Distance, Volume and Destination (Blue Stream Project)

• LNG: Popular and preferred choice– Strong gas demand in ever growing power sector– LNG is growing more rapidly due to the relative cost

reduction, abundant supply, mature technology, and increasingly flexible contract terms and conditions

Transportation Costs by Types of Natural Gas Trade

Source: APERC (2000), “Natural Gas Infrastructure Development in Northeast Asia”

1,000 2,000 3,000 4,000 5,000 10,000

0

1

2

3

4

5

6

7

Sakhalin II

Qatar

AlaskaNatuna Yakutia

Gorgon

Irkutsk

$/MMBTU

Kilometres

LNG

PNG

6,000 7,000 8,000 9,000

Tangguh (Fujian)

ALNG (Guangdong)

US Net Imports of Natural Gas, 1970-2025 (trillion cubic feet)

Source: Energy Information Administration (2003) and (2004), “Annual Energy Outlook 2003” and “Annual Energy Outlook 2004”

Annual Energy Outlook 2003 Annual Energy Outlook 2004

Outlook of LNG for APEC

Expansion of LNG use in new locations (China, the Philippines, USA) is in sight.

Source: APERC (2002), “Energy Demand and Supply Outlook 2002” and

Energy Information Administration (2004), “Annual Energy Outlook 2004”

USA(EIA 04)

Japan(APERC)

Korea(APERC)

China(APERC)

ChineseTaipei(APERC)

Phillipines(APERC)

Total

millon ton 4.2 54.5 17 5.6 81share in total gas 1% 97% 100% 94%

million ton 46.2 62 26 16 9.5 160share in total gas 8% 98% 100% 30% 91%

million ton 86.94 69 37 56 16.7 1.9 268share in total gas 14% 100% 100% 51% 95% 36%

2002

2010

2020

LNG Developments

• Supply– Abundant supply

• Lots of green projects, significant debottlenecking potential, and new suppliers in the horizon

– Significant cost reduction• In all stages of fuel chain including liquefaction, transportation,

and re-gasification

• Demand– Robust growth

• Power sector in China

LNG Supply Cost Reduction

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Low in 1990 High in 1990 Low in 2000 High in 2000

$/MMBtu

Regasification Shipping (LNG tanker) Liquefaction Upstream Development Cost

Source: CEDIGAZ

Technology development and improvement in operation helped

reduce the total supply cost.

0

50

100

150

200

250

300

350

400

450

500

MLNG 1 Qatargas Oman LNG Qatar

$/t/

y

0

500

1000

1500

2000

2500

3000

$/m

3

Liquefaction (Left-handed)

Shipping (Right-handed)

Source: Recreated from the data available at Poten & Partners website

Note: MLNG1: 1983 grass-roots, Qatargas: 1996 grass-roots, Oman LNG: 2000 grass-roots, Qatar: 2000 expansion

Existing and Proposed LNG Receiving Terminals in China and India

Source: Spadine (2004) “LNG comes of age”, a paper presented at the APERC’s mid-year workshop 2004

LNG Supply from Australia

0

5

10

15

20

25

30

35

40

45

50

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Mill

ion

ton

nes

per

an

nu

m

Actual

Possible

NWS train 4

Darwin

NWS train 5 + Gorgon

Sunrise

Browse & Pilbara LNG

Source: Stone (2005), “Australian LNG Supply”, a paper presented at the APEC LNG workshop, March 2005

Flexibility in LNG Contracts

• Shorter duration• Price flexibility

– Evolution of pricing• Cost Plus ? Crude Oil Parity, Petroleum Product Price Indexation ?

Electricity Price Parity ?– Stable price regime

• Price floor/ceiling• Decoupling with crude oil price

• Volume flexibility– DQT/UQT ? 10%~ 20%

• Periodical price review

Monthly Natural Gas Price Movementsin Japan, Korea, Europe and USA (2000-Jan.2005)

Source: APERC Analysis (2005)

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

0.040

Jan

2000

.

4 20

00

7 20

00

10 2

000

Jan

2001

.

4 20

01

7 20

01

10 2

001

Jan

2002

.

4 20

02

7 20

02

10 2

002

Jan

2003

.

4 20

03

7 20

03

10 2

003

Jan

2004

.

4 20

04

7 20

04

10 2

004

Jan

2005

.

$/ 1

000

kcal

DUBAI in Tokyo market WTI (Market of NY) Henry Hub, La.

LNG Import Price to Japan LNG Import Price to Korea LNG Import Price to US

Coal Import Price to Japan

Cold Weather and Infrastructure

Constraint

Commencement of I raq War

Cold Weather and Infrastructure

Constraint

September 11th Terrorist Attack

Correlation between LNG Price and Crude Oil Price (1980-2003)

Source: APERC Analysis (2004) based on data from IEA (2004), “Energy Prices and Taxes” for LNG price, EDMC Database (2002) for Crude Oil Price, and Guangdong data was estimated by Petrostrategies (2002)

Decoupling with crude oil price?

y = 0.1226x + 1.2367

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

10 15 20 25 30 35 40

Crude Oil Price (CIF) $/bbl

LNG

Pric

e (C

IF)

$/M

MB

TU

y = 0.052x + 2.1133

Japan LNG

China (Guangdong) LNG

Other Notable Developments

• Equity participation of buyers in upstream– CNOOC in Tangguh Project– KOGAS in Oman Project– TEPCO and Tokyo Gas in Darwin Project

• Emergence and increase of short-term and spot deals• Technology seems as though entering the mature

stage• Recently passed US energy bill to give the federal

government authority to construct LNG terminals

Nevertheless …

• Economic barriers– Demand security ? affordability in many developing

economies – per capita income• Gas has to compete against coal

– China’s plan for reform for electricity price – indexation to coal price

• High distribution cost – China’s city gas demand

• Financial barriers– High, initial capital cost ? take-or-pay

• Regulatory/Institutional barriers– Siting, zoning regulations

• BANANA (Build Absolutely Nothing Anywhere, Anytime, Near Anybody) in US

– Environmental regulations

China’s LPG Demand for Residential Sector (1974-2002)

0

2

4

6

8

10

12

14

16

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Mto

e

Total Industry Sector Total Transport Sector

Commercial and Public Services Residential

Final LPG demand in China for 1990-2002 represented annual growth rate of 22%.

Source: APERC Analysis (2005) based on data from IEA (2004), “Energy Balances of Non-OECD Countries”

List of APERC’s Publications on Natural Gas

• Natural Gas Infrastructure Development in Northeast Asia (2000)

• Natural Gas Infrastructure Development in Northeast Asia (2000)

• Natural Gas Infrastructure Development in Southeast Asia (2000)

• APEC Energy Pricing Practices Natural Gas End-use Prices (2001)

• Gas Storage in the APEC Region (2002)• Natural Gas Market Reform in the APEC Region (2003)