natural gas in taiwan -...

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NATURAL GAS IN TAIWAN prospects for LNG

www.abareconomics.com

abare eReport 06.1

prepared for the Australian Government Department ofIndustry, Tourism and Resources

Allison Ball, Jane Mélanie and Karen Schneider

january 2006

abare

© Commonwealth of Australia 2006

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism or review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included. Major extracts or the entire document may not be reproduced by any process without the written permission of the Executive Director, ABARE.

ISSN 1447-817XISBN 1 920925 48 1

Ball, A., Mélanie, J. and Schneider, K. 2006, Natural Gas in Taiwan: Prospects for LNG, ABARE eReport 06.1 Prepared for the Australian Government Department of Industry, Tourism and Resources, Canberra, January.

Australian Bureau of Agricultural and Resource EconomicsGPO Box 1563 Canberra 2601

Telephone +61 2 6272 2000 Facsimile +61 2 6272 2001Internet www.abareconomics.com

ABARE is a professionally independent government economic research agency.

ABARE project 2688

iii

foreword

Natural gas has played an increasingly important role in meeting Taiwan’s rapidly growing energy demand since the introduction of liquefi ed natural gas (LNG) imports in 1990. This trend is likely to continue, with forecast strong growth in natural gas consumption — particularly in the power sector — over the next decade. The expansion in gas use will be supported by Taiwan’s growing economy and government policies that are favorable to natural gas.

With strong growth in natural gas demand forecast, Taiwan is expected to have a shortfall in currently contracted gas supplies in the next few years. With limited domestic gas resources, this shortfall will need to be met by additional LNG imports. However, Taiwan’s most recent process to contract long term LNG supplies was lengthy and diffi cult.

The key objective in this study is to assess the potential growth in natural gas demand in Taiwan and, in particular, the role that LNG could play in that market. Taiwan’s current and projected gas supply situation over the medium to longer term is also reviewed. Some of the issues surrounding the procurement of LNG in Taiwan are also examined.

The study was undertaken by ABARE with input from the Taiwan Institute of Economic Research.

BRIAN S. FISHER

Executive Director

January 2006

iv

acknowledgments

The authors wish to thank Lindsay Fairhead and Don Gunasekera of ABARE, Geoff Stone and Peter Ferber of the Australian Government Department of Industry, Tourism and Resources, and staff from the Australian Commerce and Industry Offi ce in Taipei for their valuable contributions during the preparation of the report. The authors also thank researchers at the Taiwan Institute of Economic Research for their valuable input to the study. In addition, the authors gratefully acknowledge the information and insights provided by Australian LNG companies during the early part of the project.

v

contents

Summary 1

1 Introduction 5Objectives in the report 6

2 Energy and natural gas in Taiwan 7Economic overview 7Energy consumption 8Natural gas consumption 11Natural gas supply 11

3 Key factors affecting natural gas demand in Taiwan 15Energy policy framework 15Security of energy supply 16Liberalising energy markets 16Environmental issues 19Nuclear power policies 19

4 Outlook for natural gas demand in Taiwan 21Analytical framework 21Developing a reference case 22Outlook for energy and gas consumption 24Outlook for LNG imports 26

5 Supplying LNG to Taiwan 27Overview of the LNG market 27Regional LNG supply capacity 28LNG procurement in Taiwan 30

6 Conclusions 33

References 35

vi

box1 The Government Procurement Law in Taiwan – key

provisions 31

fi gures1 Natural gas consumption 22 Potential LNG demand and supply balance 3A Annual growth in real GDP 7B Sectoral contribution to GDP 7C Total primary energy consumption, by fuel 8D Share of total primary energy consumption, by fuel 8E Electricity generation, by fuel, 2003 9F Natural gas consumption, by sector 11G Natural gas consumption 11H LNG imports, by source 12I Average LNG import prices (cif), Taiwan and Japan 13J National energy policy framework 15K Projected total primary energy consumption 24L Average annual growth in primary energy consumption,

by fuel, 2003–15 24M Projected natural gas consumption, by sector 25N Projected fuel mix in primary energy consumption 25O Potential LNG demand and supply balance 26P World LNG trade 27Q Proved recoverable natural gas reserves, end 2004 28R LNG projects to supply the Asia Pacifi c 29

map1 Gas fi elds, import terminal and pipeline infrastructure 13

tables1 Key economic and energy indicators 82 Electricity generation 93 Installed capacity 104 IPP projects 105 Current long term LNG supply contracts 126 Taipower’s cost of generating 1 kWh of electricity, by fuel 177 Regions and sectors in GTEM in this study 228 Share of electricity generation, by fuel, reference case 239 LNG importers and exporters, 2005 2710 LNG trade in the Asia Pacifi c, 2004, by exporter 2811 LNG export capacity, late 2005 29

1

summary

Since its introduction into the Taiwanese market in 1990, liquefi ed natural gas (LNG) has represented an increasingly important part of Taiwan’s energy consumption mix. The role of LNG is expected to continue to expand in the next ten years, with strong forecast growth in natural gas consumption — particularly in the power sector — supported by robust economic growth and favorable government policies.

With strong forecast growth in natural gas demand, there is likely to be a shortfall in Taiwan’s existing contracted gas supplies in the next few years, which will need to be met by additional LNG imports. However, the most recent process in Taiwan to contract long term LNG supply was lengthy and diffi cult and attracted limited participation from international LNG suppliers.

The key objective in this study is to assess the potential growth in natural gas demand in Taiwan and, in particular, the role that LNG could play in that market. Taiwan’s current and projected gas supply situation over the medium to longer term is also reviewed. Some of the key issues surrounding the procurement of LNG in Taiwan are also examined.

Taiwan’s natural gas marketNatural gas consumption in Taiwan has grown by almost 12 per cent a year on average since 1990, to account for 8 per cent of total primary energy consumption in 2004. Natural gas consumption in 2004 was 10.2 billion cubic metres (equivalent to 7.4 million tonnes of LNG), compared with 2.1 billion cubic metres (1.6 million tonnes) in 1990. The electricity sector has been the primary driver of the growth in natural gas use over that period and currently accounts for nearly three-quarters of total gas consumption in Taiwan (BOE 2005a).

Taiwan has limited reserves of natural gas and began importing LNG in 1990. Since then, LNG imports have grown strongly and imported LNG now accounts for 93 per cent of Taiwan’s natural gas market (BOE 2005a; fi gure 1). In 2004, LNG imports rose by 23 per cent to 6.9 million tonnes, refl ecting the start up of signifi cant new gas fi red electricity generation capacity (BOE 2005a).

Taiwan was the world’s fi fth largest importer of LNG in 2004, with imports sourced mainly from Indonesia and Malaysia under long term (20 year) contracts. With consumption currently above contracted LNG volumes, Taiwan also purchased several spot cargoes in 2004 and 2005 from

2

natural gas in Taiwan abare eReport 06.1

Oman, the United Arab Emirates, Nigeria and Australia (BOFT 2005; BP 2005).

The state owned Chinese Petroleum Corpora-tion (CPC) currently controls all aspects of natural gas supply in Taiwan, including explo-ration, production, imports and wholesale sales. CPC operates Taiwan’s existing LNG import terminal at Yungan and is currently constructing a second terminal at Taichung. There are long standing government plans for a competitive market for gas supply, although there is some uncertainty regarding how and when this will occur.

Government policies aimed at enhancing energy security by diversifying fuel types and

increasing the use of clean and more effi cient fuels to address environ-mental issues have supported the recent strong growth in LNG demand. Independent power producers, for example, may only build plants using natural gas and renewable fuels. These ongoing policy objectives are expected to strengthen the role of LNG in Taiwan’s energy market in the coming decade. Other policies that could have implications for future LNG demand include plans to liberalise electricity and gas markets and to phase out nuclear power in Taiwan.

Outlook for natural gas demandThe analysis of potential natural gas demand in Taiwan in the period to 2015 is based on ABARE’s global trade and environment model (GTEM). GTEM is a multiregion multisector dynamic general equilibrium model of the world economy.

In the absence of any signifi cant policy changes or external shocks, natural gas is expected to be one of the fastest growing sources of energy in Taiwan over the outlook period. Natural gas consumption is projected to increase at an average annual rate of nearly 6 per cent to reach 16.8 billion cubic metres (equivalent to 12.3 million tonnes of LNG) and account for 11 per cent of total primary energy consumption in 2015.

Most of this growth is projected to occur in the power sector, including the 4000 megawatt gas fi red power plant under construction in Tatan by Taipower (Taiwan’s state owned electricity utility), due to be phased into commercial operation from 2006. The contribution of natural gas to Taiwan’s electricity output is assumed to increase from 14 per cent in 2003 to 19 per cent in 2015, with the growth in gas fi red generation refl ecting government policies designed to achieve energy security and environ-mental objectives.

bcm

4

8

19941984 1989 1999 2004

Natural gas consumptionTaiwan1

2

6

LNG

Domestic gas

3


Assuming natural gas production in Taiwan remains steady over the outlook period, imports of LNG are expected to rise by 6.3 per cent a year to reach 10.5 million tonnes in 2010 and 11.8 million tonnes in 2015, compared with 6.9 million tonnes in 2004.

Outlook for LNGCPC currently has long term ‘take or pay’ contracts with Indonesia and Malaysia for 5.7 million tonnes of LNG a year, with the fi rst Indonesian contract due to expire in 2009. Taiwan also has additional ‘make good’ LNG supplies as a result of taking lower volumes than contracted between 1998 and 2001. These long term contracts and make good supplies will meet the majority of Taiwan’s LNG requirements in the short to medium term. From 2008, CPC will also import up to 3.3 million tonnes of LNG a year from Qatar, of which 1.7 million tonnes will be dedicated to supplying Taipower’s Tatan plant. However, with natural gas consumption currently above these contractual volumes, Taiwan is expected to purchase further spot cargoes of LNG in the next few years.

The projected increase in LNG imports above existing contractual levels suggests that there could be market opportunities for other LNG suppliers in the coming years. In 2010, the additional gas supply required by Taiwan is around 2 million tonnes a year, rising to more than 4 million tonnes a year by 2015 (fi gure 2).

There are a number of LNG supply projects in the Asia Pacifi c and the Middle East –– existing and planned –– that could potentially meet Taiwan’s future LNG requirements. However, many of these planned expan-sion and new supply projects will require some long term contracts from buyers to underpin their development.

Given the time required to bring LNG projects to the market, it will be important for Taiwan to commit to new supply sources soon if it is not to face an increasingly diffi cult gas supply situation in the medium term.

With an established gas market, Taiwan should be an attractive destination for LNG suppliers. However, critical to securing further LNG supplies for Taiwan will be future LNG procurement processes. The most recent process to procure long term LNG supply was lengthy and diffi cult. In 2001–03 Taipower adopted an open tendering process to secure LNG supply through the facilities of a northern receiving terminal. After three rounds of open

Mt

4

8

2004total

2010 2015

Potential LNG demand and supplybalance Taiwan2

10

2

6

AdditionalrequirementsQatarMake good MalaysiaIndonesia

4


tenders and limited responses by potential suppliers, the contract was awarded to CPC with LNG supply from Qatar.

While relatively favorable LNG prices were achieved, the contract condi-tions were risky and unattractive for many LNG suppliers, with a number withdrawing their bids after the initial stages. Such contract conditions, by raising the risks attached to LNG supply, have the potential to reduce the level of competition in the tendering process as some suppliers opt out of the Taiwanese market. From a supplier’s perspective, higher country specifi c risks need to be compensated by a higher rate of return on poten-tial investment in LNG supply infrastructure and services. The presence of this risk premium means that some supply options that would be profi table at a lower rate of return may no longer be economically viable. This could limit the number of potential suppliers to those who are able to attach lower weights to risks because of their familiarity with Taiwanese law, for example, or to accept a lower rate of return because they are backed by government support.

These issues may be particularly important in the next few years, as new regional markets for LNG exporters — such as China — emerge, and the LNG supply outlook remains tight.

5

introduction

Over the past two decades, Taiwan’s economy has expanded rapidly, with gross domestic product (GDP) increasing at an average annual rate of more than 6 per cent. In parallel with this strong economic growth, energy consumption in Taiwan has grown at a similar rate. Industry is the largest energy user in Taiwan, although major structural changes in economic output in recent years, particularly a decline in the role of energy intensive industries, have seen energy consumption shift toward the services and transport sectors.

The energy mix in Taiwan is dominated by oil and coal, which together account for nearly 84 per cent of total primary energy consumption. Natural gas has played an increasingly important role in Taiwan’s energy mix, accounting for 8 per cent of energy consumption in 2004. Three-quarters of Taiwan’s natural gas consumption occurs in the electricity sector, where gas fi red generation capacity in the state and private sectors has expanded signifi cantly in recent years.

The expansion in natural gas use has been supported by government policies that favor the use of clean and effi cient fuels, as well as energy security and fuel diversifi cation. These policies refl ect a greater emphasis on environmental protection while meeting Taiwan’s economic devel-opment objectives, as well as Taiwan’s almost total reliance on imported energy sources.

With limited domestic gas supplies, Taiwan commenced importing liquefi ed natural gas (LNG) in 1990. LNG imports now account for 93 per cent of Taiwan’s natural gas market. In 2004, Taiwan imported 6.9 million tonnes of LNG, equivalent to around 8 per cent of Asia Pacifi c LNG trade.

The state owned Chinese Petroleum Corporation (CPC), currently has a monopoly over LNG imports and gas supply in Taiwan. However, the government’s long standing gas sector policy objective is to establish a competitive environment for gas supply, which could change the struc-ture of Taiwan’s gas market, including LNG procurement, in the future.

The role of natural gas in meeting Taiwan’s energy demand is expected to continue to expand over the next decade, driven by rising energy consumption and a continuation of government policies favoring natural gas for environmental and energy security reasons. Given Taiwan’s limited domestic natural gas resources, any increase in gas consumption will entail higher LNG imports.

This implies that Taiwan will need to contract additional volumes of LNG in the next few years. However, the most recent process to secure long term LNG supplies in Taiwan was lengthy and diffi cult. Taipower, Taiwan’s state owned electricity utility, held three rounds of open tenders for LNG supply, which attracted limited interest from international suppliers. Contract conditions were generally considered risky and unattractive to many suppliers. The design and outcomes of future LNG procurement processes will be critical to attracting competitive LNG supplies for Taiwan.

1

6


Objectives in the report

The key objective in this report is to assess the potential growth in natural gas demand in Taiwan and, in particular, the role that LNG could play in that market. The likely demand for natural gas is assessed on the basis of assumptions related to economic growth, the fuel mix in power generation and other factors that will infl uence energy sector outcomes. These include policies associated with energy security, liberalisation of the electricity and gas markets, nuclear power and environmental issues, particularly those related to a reduction in greenhouse gas emissions from the energy sector. The analysis of potential future energy demand in Taiwan is based on ABARE’s global trade and environment model (GTEM).

Taiwan’s current and projected gas supply situation over the medium to longer term is also reviewed in the report. Some of the key issues surrounding the procurement of LNG in Taiwan are also examined.

7

energy and natural gas in Taiwan

Underpinned by strong economic performance, total primary energy consumption in Taiwan has increased rapidly over the past two decades, by more than 6 per cent a year. Oil and coal are the mainstay of the energy sector in Taiwan, currently accounting for 84 per cent of primary energy consumption. However, the share of natural gas, mostly through LNG imports, has grown since 1990 in response to government policies aimed at a more diversifi ed energy sector and the introduction of ‘cleaner’ fuels to address environmental issues.

Economic overviewTaiwan’s real gross domestic product (GDP) has grown rapidly over the past two decades, at an average annual rate of 6.2 per cent. The economy is heavily oriented toward the manufac-turing of consumer electronics products, mostly for export. While Taiwan was not badly affected by the Asian economic slowdown of 1997–98, the global economic downturn in 2001 led the Taiwanese economy into recession as world demand for consumer electronics and computer products fell sharply. However, by 2004, GDP growth had rebounded to 5.7 per cent (MOEA 2005; fi gure A).

Along with the strong increase in economic output, the structure of Taiwan’s economy has changed signifi cantly over the past two decades. There has been a marked decline in the contribution of agriculture and industry to GDP, accompanied by an increase in the importance of the services sector (MOEA 2005; fi gure B).

2

%

40

80

1984 1994 2004

Sectoral contribution to GDPTaiwanB

20

60

ServicesIndustryAgriculture

–4

6

10

Annual growth in real GDPTaiwanA

12

4

8

–2

%

2

1984 1988 1992 1996 20042000

8


Energy consumption

Underpinned by the strong growth in economic output, total primary energy consumption in Taiwan has increased at an average annual rate of 6.5 per cent over the past two decades. In 2004, total primary energy consumption rose by 11 per cent to 115 million tonnes of oil equivalent. This compares with 33 million tonnes of oil equivalent in 1984 (BOE 2005a; fi gure C). Energy consumption per person tripled over this period (table 1).

Refl ecting the shift in economic output, energy consumption has shifted toward the services and transport sectors, and away from the agriculture and industry sectors. Industry, however, remains the largest energy user in Taiwan, accounting for more than half of total energy consumption in 2004 (BOE 2005a).

Fuel mix in primary energy consumptionTaiwan’s energy system has remained highly dependent on oil and coal over this period. Oil, largely imported from the Middle East, accounted for 51 per cent of Taiwan’s total primary energy consumption in 2004, although its share has fallen over the past two decades from 59 per cent in 1984. In contrast, the contribution of coal to total primary energy consumption

Mtoe

19941984 1989 1999 2004

Total primary energy consumption, by fuel TaiwanC

40

80

100

20

60

HydroNuclearNatural gasOilCoal

1 Key economic and energy indicatorsTaiwan

Average annual growth

1984 1994 1984 1984 1994 2004 –94 –2004 –04

% % %

GDP (2004 dollars) NT$ billion 3 058.8 6 585.6 10 205.9 8.0 4.5 6.2Population million 19.1 21.2 22.7 1.1 0.7 0.9GDP per person NT$’000 160.4 311.0 449.8 6.8 3.8 5.3Primary energy consumption mtoe 32.7 62.7 115.0 6.7 6.3 6.5Energy intensity toe/NT$’000 93.6 105.1 88.7 1.2 –1.7 –0.3Energy consumption per person toe 1.7 3.0 5.1 5.6 5.5 5.6

Source: MOEA (2005); BOE (2005).

%

40

80

1984 1994 2004

Share of total primary energy consumption, by fuel TaiwanD

20

60

HydroNuclearNatural gasOilCoal

9


rose from 18 per cent in 1984 to 32 per cent in 2004 (BOE 2005a; fi gure D). This is partly the result of fuel diversifi cation strategies in Taiwan away from oil and partly because of coal’s competitiveness as a fuel for electricity generation.

Since the introduction of LNG in Taiwan in 1990, the share of natural gas in total primary energy consumption has increased from 4 per cent to 8 per cent in 2004 (BOE 2005a). This refl ects increased availability of natural gas, as well as government policies designed to diver-sify energy sources and to increase the uptake of cleaner and more effi cient fuels.

Nuclear power currently accounts for 8 per cent of total primary energy consumption. Its share has declined each year since the early 1990s, refl ecting growing concerns about the safety of nuclear power and delays in the construction of new generation capacity. Its share peaked at 18 per cent of energy consumption in 1985. The share of hydropower has also declined steadily over the past two decades and currently accounts for a marginal share of Taiwan’s total primary energy consumption, at 1.2 per cent in 2004 (BOE 2005a).

ElectricitySince 1984, electricity consumption in Taiwan has increased at an average annual rate of 7.5 per cent, to reach 206 terawatt hours in 2004, compared with 50 terawatt hours in 1984. The industry sector accounted for around 58 per cent of total electricity consumption in 2004,

followed by the residential sector at 19 per cent (BOE 2005a).

Coal is the main source of electricity genera-tion in Taiwan, fuelling more than half of electricity output in 2003. Nuclear power accounts for a further 19 per cent of total elec-tricity output. Natural gas has made signifi cant inroads in the power generation sector in Taiwan since the early 1990s and in 2003 it accounted for around 14 per cent of total electricity generation (IEA 2005a; fi gure E). In terms of capacity, 23 per cent of Taipower’s installed electricity generation capacity is gas

Electricity generation, by fuel, 2003TaiwanE

Coal 55%

Oil 9%

Natural gas 14%Nuclear 19%

Hydro 3%

2 Electricity generationTaiwan

1983 1993 2003

GWh % GWh % GWh %

Taipower 47 473 100 104 637 100 142 547 100Coal 8 175 17 36 954 35 61 275 43Oil 15 406 33 24 256 23 14 016 10Natural gas – – 2 354 3 21 495 15Nuclear 18 904 40 34 354 33 38 889 27Hydro 4 988 10 6 719 6 6 872 5

IPP – – – – 28 516

Cogeneration plant – – 10 567 – 37 846 –

Total 47 473 – 115 204 – 208 909 –

Source: BOE (2004).

10


fi red, refl ecting the use of gas as primarily a peak-to-mid load fuel (BOE 2004, 2005a; tables 2 and 3).

The Taiwan Power Company (Taipower) is the government owned enterprise responsible for the development, generation, transmission, distribution and marketing of electricity in Taiwan. In 2004, it accounted for 74 per cent of Taiwan’s total electricity output. The government has also encouraged industrial plants to develop cogeneration systems and sell surplus power to Taipower for distribution. Around 7 per cent of Taiwan’s power supply was sourced in this way in 2004. The remaining 19 per cent of Taiwan’s power generation was sourced from eight independent power producers (IPPs) (BOE 2005a; Taipower 2005). Six of the existing IPPs are gas fi red, while the remaining two are coal fi red (table 4). The current and proposed structure of the electricity market is discussed in more detail in chapter 3.

4 IPP projectsTaiwan

Capacity Fuel Startup

MWCompanyMailiao 1 800 Coal 1999Everpower 900 LNG 2000Hoping 1 300 Coal 2002Hsintao 600 LNG 2002Chiahui 670 LNG 2003Kuokuang 480 LNG 2003Star Energy 490 LNG 2004Sun Ba 980 LNG 2004Ever Plus 960 LNG Permit cancelled

Total 8 180

Source: Taipower (2005); BOE (2004).

3 Installed capacityTaiwan

1984 1994 2004

MW % MW % MW %

Taipower 12 960 100 20 983 100 27 589 100Coal 2 505 19 5 900 28 8 100 29Oil 4 782 37 5 069 24 3 571 13Natural gas – – 1 222 6 6 273 23Nuclear 4 193 32 5 144 25 5 144 17Hydro 1 480 11 3 648 17 4 501 16

IPP – – – – 7 231 –

Cogeneration plant 196 – 1 850 – 7 129 –

Total 13 156 – 22 833 – 41 949 –

Source: BOE (2005).

11


Natural gas consumption

Natural gas consumption in Taiwan has increased by 11.8 per cent a year since 1990, to reach 10.2 billion cubic metres (equivalent to 7.4 million tonnes of LNG) in 2004, compared with 2.1 billion cubic metres (1.6 million tonnes) in 1990. In 2004, natural gas consumption increased by more than 20 per cent, driven by stronger economic growth in that year and the start up of signifi cant new gas fi red electricity generation capacity (BOE 2005a).

The electricity sector has been the primary driver of growth in natural gas use over the period since 1990 and currently accounts for nearly three-quarters of total gas consump-tion in Taiwan, compared with 35 per cent in 1994. In particular, six LNG IPP projects came into operation over that period (table 4). The remaining consumption in 2004 occurred in end use sectors, notably industry (13 per cent) and residential (9 per cent) (BOE 2005a; fi gure F). Gas consumption in the industry sector has been declining in recent years, refl ecting the overall contraction of sectors such as ceramics and glass manu-facturing, which have traditionally used natural gas as their main energy source.

The residential and commercial sectors represent around 12 per cent of the Taiwanese gas market and gas accounts for a small proportion of total energy consumption in these sectors. This refl ects a number of factors, including the competitiveness of liquefi ed petroleum gas (LPG) relative to LNG, the limited coverage of gas distribution networks, particularly in southern and central Taiwan, and the high fi xed costs involved in connecting new residential premises to gas distribution networks.

Natural gas supplyThe government owned Chinese Petroleum Corporation (CPC), which operates under the Ministry of Economic Affairs, currently controls all aspects of natural gas supply in Taiwan,

including exploration, production, imports and wholesale sales.

Domestic gas productionTaiwan has limited domestic gas reserves, estimated at 75.6 billion cubic metres (equivalent to 55.2 million tonnes of LNG) at the end of 2004 (EIA 2005a). There are currently several onshore gas producing fi elds in Taiwan, with the main fi elds located in the northwest part of the island.

Refl ecting the limited reserves, supply of domestically produced natural gas has been relatively fl at over the past decade and

1984 1994 2004

Natural gas consumption, by sectorTaiwanF

bcm

5

7

6

2

1

3

4

ElectricityIndustryResidentialCommercialand other

bcm

4

8

19941984 1989 1999 2004

Natural gas consumptionTaiwanG

2

6

LNG

Domestic gas

12


represents only a small and declining proportion of total gas consumption, at around 7 per cent in 2004. This compares with 22 per cent of total gas consumption in 1994. Domestic natural gas production was 0.7 billion cubic metres (equivalent to 0.5 million tonnes of LNG) in 2004 (BOE 2005a; fi gure G).

LNG importsTo supplement indigenous gas production and diversify Taiwan’s energy mix, LNG imports were introduced in 1990. Annual growth in LNG consumption over the period to 2004 has aver-aged 18 per cent, albeit from a low base. In 2004, LNG imports rose by 23 per cent to 6.9 million tonnes, driven by the start up of signifi cant new gas fi red electricity generation capacity. This has been the strongest annual growth since 1994 (BOE 2005a).

Indonesia and Malaysia accounted for 95 per cent of Taiwan’s LNG imports in 2004. Taiwan also sourced several spot cargoes from the United Arab Emirates, Oman and Nigeria, to meet strong growth in demand above contracted volumes and because of a shortfall in available supplies from Indonesia (BOFT 2005; fi gure H). Taiwan was the world’s fi fth largest importer of LNG in 2004. It accounted for 5 per cent of world trade and 8 per cent of the Asia Pacifi c LNG market in 2004 (BP 2005).

CPC, Taiwan’s single wholesale supplier of LNG, currently has long term (20 year) contractual arrangements with LNG exporters in Indonesia and Malaysia for 5.67 million tonnes of LNG a year (table 5). The fi rst of these contracts with Indonesia is due to expire in 2009. CPC has also completed a sales agreement with RasGas in Qatar for up to 3.3 million tonnes a year from 2008 to supply LNG to Taipower’s planned Tatan gas plant in northern Taiwan. Of this total, 1.68 million tonnes a year will be supplied to the Tatan plant (CPC 2004).

Until 2004, Taiwan’s level of LNG demand was below contracted levels, refl ecting slower

than projected economic growth and delays in the development of gas fi red power plants. This resulted in CPC selling, redirecting and time swapping a number of cargoes with other buyers, including Japan and Korea, to assist in managing the oversupply situation. In addition, CPC reduced its off take from long term contracts between 1998 and 2001, but agreed to take additional volumes from suppliers in future years under ‘make good’ contract provisions as compensation.

With 2005 demand likely to be above long term contracted volumes, and ongoing po-tential shortfalls in cargoes from Indonesia, CPC has continued to purchase additional spot cargoes this year. LNG imports to August 2005 were 4.6 million tonnes, 4 per cent higher than in the same period of 2004. Additional spot cargoes have been sourced from Oman and Australia (BOFT 2005).

Mt

3

4

6

1990 1992 1994 19981996 20022000 2004

LNG imports, by sourceTaiwanH

1

2

5

UAENigeriaOmanMalaysiaIndonesia

5 Current long term LNG supply contractsTaiwan

Source Quantity Duration

MtpaContractBadak III Indonesia 1.58 1990–2009MLNG II Malaysia 2.25 1995–2015Badak VI Indonesia 1.84 1998–2017RasGas Qatar 3.30 2008–2033

Source: CPC (2004).

13


LNG import prices have risen in 2004 and 2005 in line with higher crude oil prices. Up to 90 per cent of LNG import prices can be linked to oil prices in long term LNG contracts. Prices for importers such as Taiwan, that have contracts with strong links to crude oil prices, have risen the most in this period, and Taiwan’s LNG import prices are currently among the highest in the region. Taiwan paid US$7.05/MBtu on average for LNG imports in the fi rst half of 2005, more than US$1/MBtu above the average for Japan over the same period. Prices for LNG imports from Indonesia have increased even further over this period, averaging US$8.33/MBtu for the fi rst half of 2005 (BOFT 2005; IEA 2005b;

fi gure I). This mostly refl ects the strong correlation between crude oil prices and LNG prices in Taiwan’s LNG contracts with Indonesia.

LNG import infrastructureCPC constructed and operates the Yungan LNG receiving terminal located in southern Taiwan (CPC 2004; map 1). The terminal has an offi cial handling capacity of 7.87 million tonnes a year, following the completion of phase III of CPC’s long term expansion project in 2003 (BOE 2004). A further expansion in capacity at the terminal is also planned (FACTS Inc 2005a).

CPC is constructing a second receiving terminal and associated infrastructure in Taichung in Taiwan’s north. The receiving terminal will have a capacity of 3 million tonnes a year and is currently due to be completed in 2007-08. The terminal project includes a 135 kilometre undersea pipeline from Taichung to Taipower’s planned Tatan power plant (CPC 2004, 2005; FACTS Inc 2005a). The terminal will supply power plants and industrial sites located in the region. To encourage the building of the northern terminal, the government has imposed a 1 per cent penalty on gas moved from the southern terminal at Yungan to supply the Tatan power plant (FACTS Inc 2005a).

Retail gas supplyDistinct from natural gas supply at the whole-sale level, retail supply of natural gas in Taiwan is characterised by multiple sellers. These privately owned retail companies sell natural gas primarily to the residential and commercial sectors. However, despite the large number of retailers, competitive pres-

US$/MBtu

2

4

6

Average LNG import prices (cif)Taiwan and JapanI

8

July2003

July2002

July2004

July2005

Taiwan, Indonesia

Taiwan, average

Japan, average

Gas fields, import terminals and pipeline infrastructure Taiwan1

Taipei

Gas field

Gas pipeline

Power plant

Yungan LNGterminal

Tatan

Taichung LNG terminal(under construction)

Tainan

14


sures are limited in these downstream sectors because each retailer is guaranteed a regional monopoly.

Gas pricingWholesale and retail prices of natural gas in Taiwan are regulated by the Bureau of Energy in the Ministry of Economic Affairs, according to the guidelines for the Tariff Review of Gas Utilities. Under these guidelines, wholesale prices of natural gas are determined by CPC based on a cost-plus formula that takes into account the fi xed cost attributable to natural gas supply as well as variable cost factors, including the cost of LNG imports.

Wholesale prices for non city-gas companies are reviewed on a monthly basis (and every three months for city gas companies) to refl ect changes in LNG import prices. As an outcome of these reviews, CPC is entitled to adjust gas prices to its customers within a limited range. However, price revisions beyond the allowable range are submitted to the Bureau of Energy for approval prior to being put into effect. A similar regime is applicable to retail prices set by city gas companies.

15

key factors affecting natural gas demand in TaiwanGrowth in natural gas consumption in Taiwan is expected to continue over the longer term and will be underpinned by the national energy policy framework. Policies likely to affect the outlook for natural gas demand in Taiwan include those related to energy security and fuel diversifi ca-tion; deregulation of electricity and gas markets; enhancement of environmental protection; and a decline in the role of nuclear power. Increasing natural gas use features heavily in current government policies in Taiwan as it is safe, clean burning and effi cient. However, recent trends in LNG prices have some implications for these policies.

Energy policy frameworkEnergy policy in Taiwan consists of a wide array of laws and regulations designed to achieve the overall objective of a ‘liberalised, orderly, effi cient and clean energy supply and demand system’. National energy policy involves six strategic policy guidelines (BOE 2004; fi gure J):

■ stabilising energy supply

■ improving energy effi ciency

■ liberalising energy markets

Energy policy in Taiwan

Changes in foreign and domestic energy situation

Trend toward liberalisation of energy industries

Increased environmental protection pressure

Stabilisingenergysupply

Promotingenergy

efficiency

Deregulatingenergy

enterprises

Reinforcingenergy research and development

Promoting energy education and dissemination

Policy guidelines

Background

Overall objectiveLiberalised, orderly,

efficient and clean energy supply and demand system

Enhancingenergy safety

and environmental protection

National energy policy framework TaiwanJ

3

16


■ enhancing environmental protection

■ improving energy research and development

■ engaging in public education and communication on energy issues.

Security of energy supplyTaiwan has limited domestic energy resources, a situation that has led to an increasing reli-ance on imports to meet its energy requirements. In 2004, imported energy accounted for 98 per cent of total energy supply, compared with 89 per cent in 1984. Dependence on imports of fossil fuels in 2004 was even greater, at 99 per cent of total energy supply (BOE 2005a). Taiwan’s energy imports were valued at US$14 billion in 2003, equivalent to 11 per cent of Taiwan’s total import bill, and around 4.9 per cent of GDP (BOE 2004).

Refl ecting Taiwan’s high dependence on energy imports, energy security has been a key factor underpinning past trends in energy consumption. The strategy of fuel diversifi cation was one of the key factors that led to the introduction of LNG into Taiwan in 1990 and is a key driver of the planned additions to gas fi red generation capacity and LNG import infrastructure.

Ensuring access to reliable and adequate supply of energy at reasonable prices —referred to in Taiwan’s national energy policy as stabilising energy supply — remains a core policy priority in Taiwan. Efforts to diversify the fuel mix and the sources of energy supplies can be expected to continue to infl uence the composition of future energy consumption. The current objectives are to continue to lower the share of oil in Taiwan’s energy mix and to expand the shares of natural gas and renewable energy (BOE 2005b).

In contrast with other countries in the region with similar import dependence, such as Japan and the Republic of Korea, Taiwan is not emphasising the potential role of nuclear power to enhance energy security, with the share of nuclear power expected to fall in the longer term.

Liberalising energy marketsThe deregulation of energy related enterprises and the enhancement of competition in energy markets also features prominently in energy policy in Taiwan. Current plans include the introduc-tion of competition in gas supply in Taiwan, and the liberalisation of the electricity distribution market. However, plans to liberalise both markets are long standing and have been delayed on several occasions and it is uncertain at this stage if and when these reforms will occur.

ElectricityWith three-quarters of natural gas used in power generation, the liberalisation of the electricity sector has the potential to affect the long term outlook for natural gas in Taiwan. Reforms in the electricity sector to date have been restricted to the introduction of independent power producers (IPPs), although comprehensive restructuring plans are currently being considered in the legislature.

As in many economies, the main driving force for electricity market reform is the need to overcome power shortages and raise the reserve margin, which had fallen below the desired 15–20 per cent range since 1990. This factor, combined with the need to secure adequate private funding for power sector development and the global trend toward electricity market reform, led to the endorsement of IPPs by the Ministry of Economic Affairs (MOEA) in 1994.

17


The phasing in of IPPs has been undertaken in three stages in January 1995, August 1995 and January 1999. In these stages, the MOEA approved the development of nine private sector thermal power plants, with a total installed capacity of 8180 megawatts (table 4). IPPs are excluded from bidding for nuclear capacity.

With a view to pursuing energy diversifi cation policies and to achieving environmental objec-tives, the phase of IPP bidding in 1999 included a requirement that new thermal capacity be gas fi red. As a result, close to 85 per cent of total generation capacity additions by IPPs by 2010 is expected to be gas fi red. The demand generated by these gas users underpins to a large extent the expected overall growth in LNG demand in Taiwan over that period.

To date, the development of IPPs in Taiwan has not been accompanied by major changes to existing institutional structures or the introduction of competition in electricity supply. All IPPs are currently obliged to sell their electricity to Taipower under power purchase agreements and the electricity market remains heavily regulated. Taipower is currently obligated to purchase IPP generated electricity under 25 year contracts, regardless of whether that electricity is required. IPPs are restricted to 20 per cent of Taiwan’s total power generation capacity.

Even though foreign investors have been permitted full equity participation in IPPs since 2002, the highly regulated regime and the potential policy risks associated with extensive govern-ment involvement in the sector have failed to attract signifi cant foreign capital to the Taiwanese electricity industry.

Some of the issues associated with heavy regulation of the electricity sector include a mismatch between the costs of power genera-tion and the cost of electricity to consumers. Current high LNG import prices and the bias toward gas fi red generation by IPPs have led to higher costs for the electricity that Taipower must purchase, as well as for its own gas fi red generation (table 6). Taipower –– whose budget and major spending plans must be approved by cabinet and the legislature –– has not been allowed to raise electricity rates since 1983, and must absorb these higher costs (FACTS Inc 2005b).

Taipower will be required to purchase power from the IPPs until it is privatised, or the new law is passed to liberalise the domestic power industry, allowing private companies to compete with Taipower for their own share of the market. This situation is likely to result in Taipower oper-ating at a loss in 2005 and may have implications for the attractiveness of Taipower when it is privatised (FACTS Inc 2005b). Privatisation of Taipower, which has been delayed several times since 2001, is currently scheduled for 2006, although revisions must be made to the existing electricity law in Taiwan before this can occur (EIA 2005b; Taipei Times 2005a).

Fundamental reform through regulatory and structural changes is proposed in a revised draft of Taiwan’s electricity law, which has not yet been approved by the legislature. Key aspects of the proposed revised electricity law include:

• the continued operation of Taipower as a vertically integrated entity

• the entry of new suppliers in electricity generation, transmission and distribution

• regulation of the electricity generation fuel mix through the IPP program

• introduction of a wholesale electricity pool and an Independent System Operator

6 Taipower’s cost of generating 1 kWh of electricity, by fuel

2003 2004

NT$ NT$

Nuclear 0.67 0.65Coal 0.83 1.07LNG 3.71 5.62Wind 1.65 naOil 2.10 2.26

na Not available.Source: FACTS Inc (2005b).

18


• provision for wholesale and retail electricity sales as well as direct sales to nearby customers through private power lines

• introduction of customer choice of supplier.

The revised draft of the electricity law was sent by the Executive Yuan (the highest administrative organ in Taiwan with powers akin to those of Cabinet in the Australian political system) to the Legislative Yuan (the highest representative organ for approving national policy in Taiwan with functions similar to Parliament in the Australian political system) for review in December 1999. The revised draft was resubmitted by the Executive Yuan in May 2002 and is still pending in the Legislative Yuan (Taipei Times 2005a). The timeframe for its approval remains highly specu-lative.

Under these plans, Taipower would retain a monopoly on transmission and distribution networks, while its generating assets would be split into several fi rms. Taipower would also retain exclusive control over nuclear and hydropower plants. The proposed approach to reform indicates a preference to maintain Taipower as a vertically integrated enterprise. While in prin-ciple new players will be allowed to enter the market at all stages of the electricity supply chain, the development of competition is likely to be hindered unless third party access to Taipower’s transmission and distribution networks is permitted.

The implications of the long term electricity reform proposals for LNG demand in Taiwan are not clear. In the past, government policies have played a central role in determining the fuel mix for power generation in Taiwan, partly through approval of Taipower’s development programs, and, more recently, through fuel use requirements imposed on IPPs. Given the central impor-tance of IPPs in the government’s electricity development plans it is likely that the fuel mix for electricity generation will continue to be at least partly determined by government policy. On current indications, this will favor LNG, despite current high fuel costs.

Natural gasThere are also plans to privatise CPC and introduce competition in gas supply. The 2001–03 Taipower tender process for the supply of LNG through a northern terminal to the Tatan power plant was the fi rst attempt to establish a more competitive market for gas by removing CPC’s monopoly over gas imports. However, rather than enhancing competition in the gas market, the decision to award the contract to CPC reinforced the existing monopoly gas supply structure. It is now uncertain when and if this structure will change, and what implications it may have for LNG demand and future procurement activity.

One option for reform could be for Taipower to directly import LNG through its own receiving terminal, rather than through CPC. It is understood that Taipower is currently considering such plans.

The existing plan for reform of CPC also falls short of comprehensive deregulation of the gas supply industry. There are no plans, for example, to introduce competition in retail gas supply, which will continue to be characterised by regional monopolies.

Liberalisation in power and gas markets is likely to increase competitive pressures on utilities and provide incentives for cost minimisation, thereby increasing the emphasis on prices and fl exibility in fuel procurement activities. In a liberalised market, it is more diffi cult for utilities to forecast their demand for fuels because they face greater uncertainty about future sales. Utilities are likely, therefore, to be more reluctant to commit to large volumes of fuel supplies under long term contracts. As observed in Japan following partial liberalisation of the gas market, this has implications for future LNG demand and contracts: Japanese utilities have been seeking more fl exible and shorter LNG contracts in recent procurement activities (Ball et al. 2004).

19


Environmental issues

Taiwan’s sustained period of strong economic growth and energy consumption, underpinned by growth in energy intensive industries, has raised some serious environmental issues, including pollution of air and water. As a result, the harmonisation of economic development and environ-mental issues is now an integral part of the energy policy framework in Taiwan (BOE 2004). Consequently, energy effi ciency and conservation objectives, as well as pollution control measures, are included in energy policies.

Further, the active introduction of ‘cleaner’ fuels such as natural gas is built into the government’s energy policy agenda. This is refl ected, for example, in the requirement that IPPs selected in the most recent stage of open bidding for additional power generation capacity use LNG. Taiwan’s government reportedly aims to double natural gas consumption by the end of the decade to cut emissions of greenhouse gases (Taipei Times 2005b). There are also plans to develop renew-able energy and aggressively adopt its use (BOE 2004).

A National Energy Conference was convened in Taipei in 1998 with the aim of formulating strategies and measures in response to the United Nations Framework Convention on Climate Change. Even though Taiwan is not able to be a party to the Kyoto Protocol because it is not a member of the United Nations, it has expressed a desire to reduce greenhouse gas emissions and pursue sustainable development (EPA 2002).

More recently, Taiwan held a General Energy Conference in June 2005 to develop further response strategies for addressing climate change. In particular, plans to cut carbon dioxide emissions by 170 million tonnes a year by 2025 were announced. The MOEA plans to impose restrictions on emissions from Taiwan’s top 200 energy consuming enterprises. In the periods 2008-15 and 2016-25, the enterprises’ factories must decrease the intensity of their carbon dioxide emissions by 10 per cent and 16 per cent respectively (EIA 2005b). This is currently being achieved through voluntary emission reductions, including energy conservation and energy effi ciency policies. Future options under consideration could include emission cap and trade mechanisms and a carbon tax (BOE 2005b).

Policies designed to abate greenhouse gas emissions can have a positive impact on natural gas demand growth, particularly if these involve measures that increase the relative cost of more carbon intensive energy sources such as coal. They can also slow overall growth in energy consumption, including that of natural gas. However, given the tentative nature of emission abatement policies in Taiwan, the implications for future LNG demand are highly speculative. It is probable, however, that natural gas will continue to be emphasised in government energy policy for environmental reasons.

Nuclear power policiesGovernment policy on nuclear power could also have implications for LNG. Nuclear power accounted for 19 per cent of total electricity generated in 2003, and Taiwan has three oper-ating nuclear plants, with a fourth under construction. While start up costs are relatively high, on the basis of operation costs, nuclear energy is reportedly cheaper than any other fuel source in Taiwan (FACTS Inc 2005b). However, safety and environmental concerns in government and the community are contributing to a re-evaluation of nuclear power in Taiwan.

This trend is highlighted by the slow progress and problems with the fourth nuclear power plant, that has been subject to halts in construction, government intervention and community opposi-tion. In October 2000, the government halted construction and scrapped the plant. The project

20


was reinstated in February 2001 after the constitutional court ruled that the decision to halt the project had procedural fl aws because law makers were not consulted.

In October 2005, the timetable for commercial operation of the plant was postponed for the third time. One unit of the plant’s core reactor, with a capacity of 1350 megawatts, was to begin operation in July 2006, and a second unit of the same capacity in July 2007. Commercial operation of the plant is now planned for 2009. Taipower has stated that rising import costs of raw materials, lack of investment interest in the project and stalled construction are reasons for the delay. There are also reports of problems with maintaining and securing contracts for the project, as a result of low compensation for losses when the project was suspended and the uncertainties surrounding government nuclear policy. As at the end of September 2005, the project was 62 per cent complete (Taiwan Headlines 2005a).

Recent government statements suggest that the plant will be completed, but that Taiwan will not build another plant after the fourth. The current government is committed to a policy of a ‘nuclear free homeland’ and the Executive Yuan approved a draft bill for the promotion of a nuclear free homeland in May 2003. The bill would ban the development of nuclear weapons, gradually phase out the use of nuclear power, and boost use of renewable energy (Taiwan Headlines 2005b; BOE 2005b). It is possible that Taiwan’s fi rst three nuclear power plans will all be decommissioned by 2025 (Taipei Times 2005c).

With Taiwan’s government ruling out nuclear power as a future option for electricity genera-tion, it is likely that coal fi red capacity will rise, as nuclear and coal are both effective base load fuels. The MOEA recently stated that coal could account for as much as half of Taiwan’s installed capacity by 2025, compared with 32 per cent in 2004. In the shorter term, Taipower currently has four coal fi red plants under construction and another seven have been approved (Taipei Times 2005c). There are no clear indications at this stage how a signifi cant increase in coal fi red power generation would be consistent with Taiwan’s emphasis on environmental outcomes.

As nuclear and gas fi red power generation typically cater for different load characteristics, changes to nuclear energy policy are likely to affect the demand for LNG only at the margin over the long term. In the short to medium term, however, Taipower has stated that the shortfall in capacity from the delay in the fourth nuclear plant will be met through its planned Tatan gas fi red plant due to start in 2006 (Today Online 2005).

21

outlook for natural gas demand in TaiwanAnalytical frameworkThe analysis of the outlook for natural gas demand in Taiwan over the period to 2015 is based on simulation results from ABARE’s global trade and environment model (GTEM). GTEM is a multiregion, multisector, dynamic general equilibrium model of the world economy.

GTEM provides an appropriate framework for energy market analysis because it takes into account the interactions between different sectors in the economy and between economies through trade linkages. The model includes a high level of commodity disaggregation, including a detailed treatment of energy and energy using sectors. This enhances GTEM’s ability to analyse the impacts of changes in energy policies and other external factors that could infl uence the operation of energy markets.

GTEM also includes a sophisticated representation of technological change and interfuel substi-tution in the energy sector. The ‘technology bundle’ approach incorporated in the modeling framework allows electricity to be generated from six recognised fuels or technologies: coal, petroleum, gas, nuclear, hydropower and other renewable technologies. Substitution between technologies occurs in response to changes in their relative costs. This feature is important for analysing the impacts of policies that have an impact on fuel costs and choice, such as those related to energy market reform.

Other characteristics of the energy sector are also important in the modeling context. This includes the fact that investment in energy infrastructure tends to be long term and expensive. GTEM is able to capture the cost of investment in new infrastructure that is often required when fuel switching occurs — for example, the expansion of gas distribution networks — where these costs are refl ected in the database.

Further information on GTEM is provided on ABARE’s web site (www.abareconomics.com).

Regional and sectoral aggregationAt its most disaggregated level, GTEM consists of equations and data that represent the production, consumption, trade and investment behavior of representative producers and consumers in 68 regions across 62 sectors. The database used to simulate the potential demand for natural gas in Taiwan in this report has been aggregated to the 23 regions and 18 sectors presented in table 7.

The sectoral aggregation was chosen to include the fi ve fossil fuels –– brown steaming coal, black steaming coal, coking coal, oil and gas –– together with electricity and refi ned petroleum products. The aggregation in the study also includes the major energy intensive industries that are likely to infl uence total energy consumption. The regional aggregation also identifi es major energy producing and trading regions and, in particular, potential gas suppliers to Taiwan.

4

22


Developing a reference caseAs a dynamic general equilibrium model, GTEM can be used to develop a reference case projection. The reference case projects, among other variables, the growth in labor, capital and sectoral outputs in each region in the absence of any signifi cant policy changes. In this study, the reference case represents the likely outlook for economic activity and energy demand in Taiwan over the period to 2015.

Economic growthIn developing a reference case for Taiwan, several key assumptions have been made. The fi rst of these relates to projected GDP growth rates in Taiwan and other regions identifi ed in the aggregation. The GDP growth rates used in the study are based on historical data to 2004. Long term projections to 2015 are from ABARE and are derived by fi tting an ARIMA (autore-gressive integrated moving average) forecasting model to the historical GDP data.

GDP in Taiwan is assumed to grow at an average annual rate of 4.1 per cent over the period 2004–15. However, a key downside risk to Taiwan’s economic growth prospects over the coming decade is the expected continuation of recent trends to relocate some production activi-ties from Taiwan to mainland China. As Taiwan’s economy becomes more advanced, indus-tries in Taiwan have been relocating to maintain competitiveness and take advantage of the lower costs of land and labor in China. While the trend originated in Taiwan’s labor intensive

7 Regions and sectors in GTEM in this study

Regions Sectors

1 Taiwan 1 Brown steaming coal 2 Australia 2 Black steaming coal 3 Canada 3 Coking coal 4 Chile 4 Oil 5 China, People’s Republic 5 Gas 6 Hong Kong, China 6 Petroleum products 7 Indonesia 7 Electricity 8 Japan 8 Iron and steel 9 Korea, Rep. of 9 Nonferrous metals 10 Malaysia 10 Aluminium 11 Mexico 11 Chemicals, rubber and plastics 12 New Zealand 12 Nonmetallic minerals 13 Peru 13 Other minerals 14 Philippines 14 Other manufacturing 15 Russian Federation 15 Transport (other than marine) and trade 16 Singapore 16 Services 17 Thailand 17 Agriculture, fi sheries and forestry 18 United States 18 Marine transport 19 Viet Nam 20 Middle East 21 Other OPEC 22 Europe 23 Rest of World

23


manufacturing sectors, it has broadened to other sectors, including electronic and information technology goods. Direct investment in production facilities in China has been assisted in recent years by the Taiwanese Government’s decision to allow direct investment in China, and the acceleration of reform and investment liberalisation policies in China (Mukoyama 2002).

Fuel mix in power generationAlso incorporated in the reference case are assumptions relating to the fuel mix in electricity generation. The shares of electricity produced by different fuels (coal, oil, gas, nuclear, hydro-power and other renewable energy technologies) to 2015 are determined exogenously (outside the model) in the reference case, using government, industry and other projections. For Taiwan, the fuel mix assumptions are presented in table 8.

Coal is expected to remain the dominant fuel for power generation in Taiwan over the outlook period, refl ecting to a large extent its competitiveness relative to other fuels and the expected decline in the role of nuclear as a baseload fuel. Coal fi red power generation is assumed to contribute around 58 per cent of total electricity output in 2015. In particular, there is a rapid rise in coal’s contribution to power generation in the later part of the outlook period,

following the expected decommissioning of Taiwan’s fi rst nuclear power plant in 2011 or thereabouts. The share of nuclear power is expected to fall to below 16 per cent by 2015.

However, substantial changes in the fuel mix are also expected to affect oil and gas. These shifts are driven signifi cantly by Taiwan’s energy strategy, which aims to reduce oil dependency and increase the use of natural gas for electricity generation on economic, environmental and energy security grounds.

Refl ecting these policy objectives, the share of oil in the electricity generation fuel mix is expected to fall to less than 5 per cent in 2015.

In contrast, the share of gas is expected to rise from 14 per cent in 2003 to 18.5 per cent in 2015. The rise in the share of natural gas for power generation is based on signifi cant expan-sion in gas fi red generation capacity from both Taipower and IPPs. The most signifi cant power generation project in terms of LNG prospects in Taiwan is the Tatan gas fi red combined cycle plant, which is expected to have an installed generation capacity of 4384 megawatts and to add 1.68 million tonnes to Taiwan’s annual LNG consumption by the end of this decade.

The project consists of two generators that will burn either natural gas or diesel, and four using only natural gas. The company had planned to use diesel at Tatan until switching to natural gas in 2008 to coincide with the development of the Taichung LNG import terminal. However, it recently announced it will start using natural gas in 2006, two years earlier than planned, to reduce the cost of burning diesel. Natural gas will be transported from the south to make the switch from diesel (Energy Argus 2005; Taipei Times 2005d).

Other assumptionsThe absolute level of gas demand in the power sector is determined by growth in total elec-tricity output, by changes in the share of gas in electricity generation, and by improvements in the effi ciency of natural gas consumption in power plants. It is assumed in the analysis that the

8 Share of electricity generation, by fuel, reference case Taiwan

2003 2015

% %

Coal 53.9 57.9Oil 8.7 4.6Natural gas 14.0 18.5Nuclear 18.6 15.6Renewables 4.8 3.3

24


effi ciency of gas fi red power plants rises over the outlook period. This is based on an expecta-tion that advanced gas turbine technologies are commissioned in the recent and new electricity generation plants.

A further assumption incorporated in the reference case is that all additional gas consumption from 2005 onwards is met from LNG imports. This implies that there is no increase in domestic natural gas production in Taiwan above current levels and that production is maintained at the same level in each period of the reference case. This assumption accounts for the fact that natural gas production over the past several years in Taiwan has been steady and it is not expected that signifi cant new reserves will be found in the foreseeable future.

Outlook for energy and gas consumptionRefl ecting the assumed increase in economic output, total primary energy consumption in Taiwan is projected to grow at an average annual rate of 2.2 per cent from 104 million tonnes of oil equivalent in 2003 to 135 million tonnes of oil equivalent in 2015 (fi gure K). This implies a marked reduction in the rate of growth relative to the 1990s. This trend is consistent with the lower economic growth projections and continuing structural shifts toward less energy intensive industries such as the information and communications technology sector and the services sector. It also refl ects govern-ment policies aimed at improving energy effi ciency in the coming years.

Rising primary energy consumption over the outlook period implies an expansion in Taiwan’s consumption of fossil fuels. Natural gas is projected to be the fastest growing energy source in Taiwan over the period to 2015, increasing by nearly 6 per cent a year on average (fi gure L). Natural gas consumption is projected to reach 16.8 billion cubic metres (equivalent to 12.3 million tonnes of LNG) and account for 11 per cent of total primary energy consumption in 2015. This compares with 8.4 billion cubic metres (6.2 million tonnes) in 2003.

The majority of growth in natural gas demand in Taiwan is expected to occur in the electricity sector (fi gure M). Gas use in this sector is projected to increase at an average annual rate of 7.0 per cent to reach 13.5 billion cubic metres (9.8 million tonnes) by 2015, and account for 80 per cent of Taiwan’s natural gas consumption in that year, compared with 75 per cent currently. In the residential sector, gas use is projected to expand by 4.3 per cent a year, to reach around 1.5 billion cubic metres (1.1 million tonnes). Gas consumption in the industry and commercial sectors is projected to remain relatively steady over the outlook period.

Mtoe

30

60

Projected total primary energy consumption TaiwanK

50

40

10

20

Coal Nuclear HydroNaturalgas

Oil

20032015

%

3

Average annual growth in primary energy consumption, by fuel, 2003–15L

5

4

1

2

Taiwan

Coal Nuclear HydroNaturalgas

Oil

25


Relative to the robust growth in gas demand, consumption of other fossil fuels is expected to increase moderately over the period to 2015. Total coal consumption is expected to grow by around 2.5 per cent a year in the reference case, driven by the increased share of coal in electricity generation and expansions in blast furnace steel production capacity in Taiwan.

Oil consumption is projected to increase by 1.5 per cent a year over the period to 2015. This is in line with the expected decline in the contribution of oil to the fuel mix for power generation, refl ecting the relatively high marginal cost of oil fi red power genera-tion and ongoing energy security concerns. However, these impacts are moderated by

increased demand from the transport sector in response to economic growth and rising house-hold incomes over the outlook period. Despite its relatively slow growth, oil is expected to remain the dominant fuel in Taiwan’s energy mix, accounting for 47 of total primary energy consumption in 2015 (fi gure N).

Nuclear power is projected to increase at an average annual rate of 1.0 per cent over the outlook period. This assumes the commissioning of the fourth nuclear plant late this decade, and the decommissioning of Taiwan’s fi rst nuclear plant after 2011. However, as discussed earlier, safety and environmental issues are contributing to a re-evaluation of the role of nuclear power in Taiwan. If construction of the fourth nuclear plant is delayed further or does not proceed, or if the existing plants are decommissioned earlier than currently planned, the nuclear projections would be commensurately lower.

The projected growth in energy consumption is underpinned to a signifi cant extent by expansion in power generation. Electricity consumption in Taiwan is expected to increase at an average annual rate of 2.8 per cent between 2003 and 2015, to reach 279 terawatt hours in 2015. Electricity demand growth is led primarily by industry demand, particularly from energy inten-sive sectors such as iron and steel. Household demand for electricity is also expected to grow strongly as rising incomes in Taiwan lead to an increase in the use of electricity for personal services such as air conditioning and appliances.

bcm

8

Projected natural gas consumption, by sector TaiwanM

12

10

2

4

6

Electricity Residential CommercialIndustry

20032015

Projected fuel mix in primary energy consumptionTaiwanN

Coal 33%

2003 2015

Oil 47%

Nuclear 8%

Hydro 1%

Naturalgas 7%

Coal 34%

Oil 47%

Nuclear 7%

Hydro 1%

Naturalgas 11%

26


Outlook for LNG imports

Assuming that indigenous gas production in Taiwan will remain at the equivalent of 0.5 million tonnes of LNG a year, imports of LNG are expected to grow by 6.3 per cent a year to reach around 10.5 million tonnes in 2010 and 11.8 million tonnes in 2015.

As discussed in chapter 2, CPC is currently contracted to purchase 5.7 million tonnes of LNG a year under long term ‘take or pay’ contracts with Indonesia and Malaysia. The fi rst contract with Indonesia for 1.58 million tonnes a year is due to expire in 2009. These contracts will contribute to meeting a large proportion of Taiwan’s LNG demand over the short to medium term. CPC also has additional ‘make good’ LNG supplies in the coming years as a result of taking lower volumes than it had contracted between 1998 and 2001. CPC also recently committed to up to 3.3 million tonnes a year from January 2008 from Qatar’s RasGas, 1.68 million tonnes of which will be dedicated to supplying Taipower’s Tatan gas fi red power plant.

Despite these arrangements, there is a pro-jected increase in LNG import demand above LNG supply volumes over the outlook period (fi gure O). With Taipower bringing forward plans to use gas at Tatan, CPC is likely to require additional cargoes in the 2006-07 period,

with an additional 1 million tonnes (around 16 cargoes) likely to be required in 2007. CPC’s initial agreement with RasGas gives CPC a secondary right — after existing RasGas customers — to any surplus cargoes in advance of the 2008 start up of regular deliveries (Energy Argus 2005). However, as discussed in the next chapter, the international LNG supply outlook in this period will be tight.

In 2010, the additional LNG supply required by Taiwan could be around 2 million tonnes a year, rising to more than 4 million tonnes a year in 2015. The existence of this shortfall suggests that there could be market opportuni-ties for other LNG suppliers in the medium and longer term, particularly if the fi rst Indonesian contract is not renewed.

Mt

4

8

2004total

2010 2015

Potential LNG demand and supplybalance TaiwanO

10

2

6

AdditionalrequirementsQatarMake good MalaysiaIndonesia

27

supplying LNG to Taiwan

The projected strong growth in natural gas demand in Taiwan above currently contracted volumes means that additional LNG supplies will be required over the outlook period to 2015. There are a number of LNG supply projects in the Asia Pacifi c and the Middle East –– existing and planned –– that could meet Taiwan’s long term LNG requirements. However, critical to securing further LNG supplies for Taiwan will be future LNG procurement processes.

Overview of the LNG marketWorld LNG trade is characterised by a small but growing number of suppliers and buyers. There are currently thirteen countries that produce and export LNG and fi fteen importing countries (table 9). World LNG trade has increased by 6.6 per cent a year over the past two decades to reach 129.9 million tonnes in 2004, compared with 36.3 million tonnes in 1984. In 2004, LNG imports rose by 5.4 per cent on the previous year (BP 2005).

There are currently four LNG importers in the Asia Pacifi c region: Japan, Korea, Taiwan and India. The Asia Pacifi c market dominates world LNG trade (BP various years; fi gure P). In 2004, LNG imports in the Asia Pacifi c were 87 million tonnes, compared with 4.5 per cent in the previous year. Japan is by far the largest importer in the region, accounting for 65 per cent of Asia Pacifi c trade in 2004, followed by Korea (25 per cent), Taiwan (8 per cent) and India (2 per cent).

Importers in the Asia Pacifi c source most of their LNG from producers from south east Asia, Australia, the Middle East and Alaska under long term contracts. Of the eight key LNG exporters to the Asia Pacifi c, Indonesia is the largest, followed by Malaysia, Qatar and Australia (table 10).

Since 2004, there has been a greater reli-ance on distant exporters from outside the

5

9 LNG importers and exporters, 2005

Exporters Importers

Algeria BelgiumAustralia Dominican RepublicBrunei Darussalam FranceEgypt GreeceIndonesia IndiaLibya ItalyMalaysia JapanNigeria Korea, Rep. ofOman PortugalQatar Puerto RicoTrinidad and Tobago SpainUnited Arab Emirates TaiwanUnited States (Alaska) Turkey United Kingdom United States

Mt

100

19941984 1989 1999 2004

World LNG tradeTaiwanP

120

20

40

80

60

Atlantic markets India Taiwan Korea Japan

28


Asia Pacifi c region to meet growing demand, including sourcing of spot cargoes from Algeria, Nigeria and Trinidad.

Regional LNG supply capacity

Natural gas reservesIn 2004, world ‘proved recoverable reserves’ were estimated at 179.5 trillion cubic metres (equivalent to 131.1 billion tonnes of LNG). These are defi ned as the volumes in place that can be recovered in raw form in the future under local economic conditions with existing technology. Proved recoverable reserves held by the eight existing LNG exporters with long term contracts to

the Asia Pacifi c market, as well as those with capacity under construction or in advanced stages of planning, vary considerably (BP 2005; fi gure Q).

The Russian Federation and Iran have the world’s largest natural gas reserves (27 per cent and 15 per cent of the global total respectively), and while they do not currently export LNG, Russia has capacity under construction and Iran has several export proj-ects planned. Of the existing exporters to the region, the most signifi cant gas reserves are in Qatar. It should be noted, however, that not all gas reserves identifi ed in any country will be available for liquefaction.

LNG production capacity

There are currently 12 operational LNG plants in the eight countries that supply the Asia Pacifi c market through long term contracts (table 11). As of late 2005, Indonesia had the largest oper-ating capacity, followed by Malaysia, Qatar and Australia. Collectively, the total capacity of all the existing plants is about 109 million tonnes a year. However, some of the capacity in the

10 LNG trade in the Asia Pacifi c, 2004, by exporter

Exporter

Indo- Malay- Aus- United nesia sia Brunei tralia Qatar Oman UAE States Other Total

Mt Mt Mt Mt Mt Mt Mt Mt Mt MtImporterJapan 15.5 12.1 6.1 8.2 6.7 1.1 5.2 1.2 0.1 56.2Korea, Rep. of 5.3 4.6 0.9 0.4 5.8 4.4 0.1 0.4 21.8Taiwan 3.7 3.0 0.1 6.7India 1.9 1.9

Total 24.4 19.7 6.9 8.6 14.5 5.5 5.2 1.2 0.6 129.9

Other includes sport cargoes from Algeria and Nigeria.Source: BP (2005).

tcm

Proved recoverable natural gas reserves, end 2004 TaiwanQ

QatarUAE

United StatesIndonesiaAustraliaMalaysia

OmanBrunei

Russian FederationIran

Yemen

10 20 30 40 50

29


Middle East, particularly in Qatar, is dedicated to supplying markets in the Atlantic region.

There are several LNG supply projects under construction in the region. Projects under construction in late 2005 targeting the Asia Pacifi c comprised Australia’s Darwin LNG and North West Shelf Train 5 projects, Indonesia’s Tangguh project and Russia’s Sakhalin project. Some volumes from Oman Train 3 and Yemen LNG, also under construc-tion, will also be sold to Asia Pacifi c buyers (fi gure R). Together these projects will deliver an additional 29 million tonnes a year, with start dates from 2006 to 2008.

Additional projects will be required to meet forecast regional demand. In addition to Taiwan, LNG demand is also expected to grow strongly in Korea, India, China and the north American west coast. Many LNG supply projects in the region are at various stages of planning and approval and due to come on line in the next decade, including in Australia, Indonesia and Iran. This is an indication of potential capacity only and it is unlikely that potential supply projects will commence construction until some long term contracts are secured (Ball 2005).

There could also be additional LNG supplies available from the planned signifi -cant increases in Qatari capacity (around 50 million tonnes of additional capacity is proposed), which has not been included in fi gure R. The extent to which this Qatari supply is allocated to the Asia Pacifi c, if at all, will depend partly on growth in LNG imports in

the United States east coast market and in Europe, where the Qatari LNG projects are targeted.

While there is ample regional LNG export potential in the longer term, few projects dedicated to Asia Pacifi c trade are due on line before the end of the decade. As a result, the LNG market in the Asia Pacifi c appears increasingly tight in the short to medium term, especially to meet seasonal demand peaks. Adding to the tightness in LNG markets are recent supply diffi culties in Indonesia (Ball 2005).

Existing and planned international LNG supply capacity in the Asia Pacifi c and the Middle East indicates that there are potential suppliers with the capacity to meet Taiwan’s growing gas demand in the longer term, provided that project developers can secure long term contracts to underpin their projects. Given the time required to bring LNG projects to the market, it will be important for Taiwan to commit to new supply sources soon if it is not to face an increas-ingly diffi cult gas supply situation in the medium term. In the short term, Taiwan is likely to be competing with other buyers in the increasingly tight spot market and to draw in cargoes from non-traditional suppliers to Asian markets.

11 LNG export capacity, late 2005

Project Trains Capacity

no. MtpaAsia Pacifi cAustralia North West Shelf 4 11.7Brunei Lumut 5 7.2Indonesia Arun I-III 4 6.8 Bontang A-H 8 22.6Malaysia Bintulu MLNG I 3 7.6 Bintulu MLNG II 3 7.8 Bintulu MLNG III 2 6.8USA, Alaska Kenai 2 1.4

Middle EastOman OLNG 2 6.6Qatar Qatargas 3 8.9 Rasgas 4 16.0UAE Das Island 3 5.7

Total 109.1

Mtpa

LNG projects to supply the AsiaPacific TaiwanR

Australia

MalaysiaBruneiAlaskaRussiaQatarOman

UAEIran

Yemen

20 30 40 5010

ProposedUnder constructionExisting

30


LNG procurement in Taiwan

Taiwan’s growing gas market should offer an attractive opportunity for international LNG suppliers. Compared with an emerging natural gas market such as China, Taiwan is a well established market with the necessary infrastructure and institutional backing to sustain growing consumption of LNG. Taiwan’s substantial foreign exchange reserves and the high credit rating of LNG users such as Taipower also contribute to making Taiwan an attractive market from an LNG supplier’s perspective.

Despite these credentials, with an increasingly tight market in the next few years and as new markets — such as China and the north American west coast — open up for suppliers, the attractiveness of contract conditions and processes for LNG procurement in Taiwan will infl u-ence the willingness of international suppliers to sell LNG to Taiwan.

Recent procurement activityTaiwan’s most recent attempts to contract additional LNG supplies over the long term have involved lengthy and diffi cult processes. On two occasions in 2001 and 2002, Taipower conducted an open tender for the construction of an LNG supply terminal and the associated delivery of gas through the terminal. On both occasions, only limited interest was received with bids from two consortiums –– Tung Ting Corporation and United Energy –– both of which are majority owned by Taiwanese companies. In order to encourage competition in LNG supply in Taiwan, CPC was originally prohibited from the bidding process.

The lack of interest in the bid process from international LNG suppliers has been widely attrib-uted to conditions in the tender document that were not consistent with international best prac-tice and that created signifi cant risk for potential bidders. Combined with less pressing need for new electricity generation capacity because of lower than projected economic growth, both tenders were cancelled.

After revisions to the tender documentation, the tender was reissued by Taipower in November 2002. CPC was also permitted to enter the bidding process in the third round. Four bids were received: CPC, Tung Ting Corporation, United Energy and TaLNG (a joint venture between Shell and Taiwan’s Asia Cement). While the third round of tenders generated an improved response from the international LNG industry, it fell short of the interest expressed in other recent procurement processes such as that for the Guangdong project in southern China in 2002. In the case of Guangdong, eleven expressions of interest were received from consortiums inter-ested in the rights to construct the LNG receiving and regasifi cation terminal and six serious bids were received for LNG supply.

In July 2003, Taipower announced that CPC had been selected above the other three bidders to supply LNG to the Tatan gas fi red power plant. Prices were reportedly lower than the existing prices: the CPC supply price was reported to be NT$5.69 a cubic metre of LNG, signifi cantly lower than the NT$8.33 that Taipower was then paying (Reuters 2003). As discussed earlier in the report, CPC will source its LNG under this contract from Qatar. The northern receiving terminal, part of the contract conditions, is now under construction.

The process did not result in the introduction of competition in Taiwan’s LNG supply sector, as originally targeted. It is now unclear when and if liberalisation of the gas supply market will occur. The relative lack of interest in the Taipower tender also indicates that Taiwan’s LNG contract conditions were unattractive for the majority of LNG suppliers. This made it more diffi -cult to secure long term gas supplies.

The following sections provide an overview of the legal and commercial framework governing LNG procurement in Taiwan.

31


The legal framework

The Government Procurement Law that came into effect in mid-1999 provides the legal frame-work for all procurement activities undertaken by government owned enterprises in Taiwan. As LNG procurement in Taiwan is currently solely undertaken by public enterprises, the Government Procurement Law applies to all LNG procurement activities.

The provisions of the law allow for a range of tendering procedures to be adopted. These include ‘open tendering procedures’ (under which public notice is given to invite all interested suppliers to submit tenders); ‘selective tendering procedures’ (under which public notice is given to invite all interested parties to submit documents for pre-qualifi cation evaluation based on specifi c requirements, and after such evaluation, the qualifi ed suppliers are invited to tender);

Box 1: The Government Procurement Law in Taiwan – key provisions

■ Any procurement conducted by any government agency, public school or government owned enterprise (an ‘entity’) involving construction work, property or employment of serv-ices is subject to the provisions of the Government Procurement Law.

■ Open tendering procedures apply for all procurement of a value reaching the threshold of NT$1 million or above.

■ For open tendering procedures or selective tendering procedures, a reasonable time-limit for submission of tenders will be set of not be less than fourteen days.

■ Generally, a tenderer is required to deposit a bid bond, and the winning tenderer is required to deposit a performance bond. However, for any procurement under special circumstances, the bid bond and the performance bond may be waived. An entity will prescribe in the tender documentation the conditions under which the performance bond will not be returned.

■ A political party and suppliers affi liated with a political party are not permitted to partici-pate in tendering.

■ An entity is required to set a government estimate for procurement. If an entity conducts a procurement process without setting a government estimate it must state the reasons for not setting an estimate and the terms and principles for awarding the contract must be provided in the tender documentation.

■ The award of a contract must follow one of the following principles and the principle adopted must be specifi ed in the tender documentation:

– where a government estimate is set for the procurement, a tenderer whose tender meets the requirements set forth in the tender documentation and is the lowest tender within the government estimate shall be the winning tenderer

– where no government estimate is set for the procurement, a tenderer whose tender not only meets the requirements set forth in the tender documentation and has a reasonable price, but also is the lowest tender within the budget shall be the winning tenderer; or

– where a tenderer whose tender meets the requirements set forth in the tender documen-tation and is the most advantageous tender shall be the winning tenderer.

■ An entity may prescribe in the tender documentation that contracts may be awarded to different tenderers for different items or different quantities, but the spirit of competition as to the lowest price or the most advantageous tender will be respected.

32


and ‘limited tendering procedures’ (under which no public notice is given, two or more suppliers are invited to compete, or only one supplier is invited to tender).

However, the law requires that an open tendering procedure be adopted for all procurement of a value equal to or greater than NT$1 million (equivalent to around A$40 000 based on current exchange rates). All LNG procurement activities would fall into this category. Further detail on the provisions of the Government Procurement Law is provided in box 1.

The contractual frameworkWhile the ‘Government Procurement Law’ provides the overarching legal framework for LNG procurement by government owned enterprises in Taiwan, business practices surrounding LNG procurement by CPC and by potential LNG importers such as Taipower are likely to vary in terms of processes and outcomes.

CPC currently purchases LNG from Indonesia and Malaysia under long term ‘take or pay’ arrangements. Contracts with these LNG suppliers were entered into prior to 1999, when the Government Procurement Law came into effect. These previous LNG procurement activities were based on direct negotiations with selected international LNG suppliers. Once a preferred supplier was selected, CPC was required to submit its proposal to the Ministry of Economic Affairs for approval. The key considerations that are assessed to have infl uenced CPC’s LNG procurement decisions in the past are diversifi cation of LNG supply sources and fl exibility of LNG supply contracts (TIER 2002).

The most recent tender for the supply of gas to Taipower’s Tatan power plant was the fi rst time that LNG procurement in Taiwan had been subject to the new Government Procurement Law. The tender was unusual in that it was for the integrated provision of terminal facilities and the supply of LNG. In accordance with the provisions of the law, Taipower adopted an open tendering process for the construction of the terminal and the supply of gas.

Under the approach used by Taipower, once a bidder satisfi ed certain prequalifi cation criteria, the sole consideration in awarding the contract was the bid price for supply under a nonnego-tiable Gas Supply Agreement (GSA). This represents a departure from LNG procurement activi-ties undertaken by CPC in the past, where energy supply diversifi cation and fl exible delivery arrangements were also important criteria.

In addition, the GSA included certain features that were considered by international gas industry participants to be inconsistent with best practice. These included the link between LNG supply and access to a northern LNG receiving terminal, where the majority of bidders were required to bid without certainty about whether they would be able to secure timely government approval for an appropriate construction site in northern Taiwan, or, alternatively, about the terms and conditions that would be attached to third party access to an existing northern terminal.

In addition, the GSA stipulated that, in the event that Taipower was exposed to third party claims because of nonsupply, those uncapped costs, if determined by a court, would be borne by the gas supplier. This is not a typical provision in international gas supply agreements. Further, these risks were reinforced by the provision in the GSA that the contract dispute resolu-tion procedures would be determined by Taiwanese arbitration law. Again, this is not a typical provision in such international contracts where the norm is to adopt international law.

The tendering process for the supply of gas to the Tatan power station was to have represented a turning point in Taiwan’s LNG procurement history and provide the opportunity for a number of domestic and international players to participate in LNG procurement, in addition to CPC. The timeline for achieving this goal is now more uncertain, and it remains to be seen whether future LNG procurement in Taiwan will face similar problems as the recent Taipower tender process.

33

conclusions

Since its introduction in Taiwan in 1990, LNG has played an increasingly important role in the energy supply mix. Strong growth in energy demand, government policy aimed at diversifying energy sources away from oil and expanding the use of cleaner and more effi cient fuels have been the key drivers of the growth in natural gas consumption in Taiwan.

Analysis in this study indicates that gas consumption in Taiwan is likely to remain on a high growth trajectory for some time. Natural gas consumption in Taiwan could reach more than 12 million tonnes in 2015, nearly double its current level. As in the past, government policies supporting energy security and environmental protection are expected to continue to favor natural gas and play a key role in driving this growth. Government policies related to gas and electricity market deregulation and plans to phase out nuclear power are also likely to have implications for natural gas demand. However, these policies are less predictable in their direc-tion and timing.

Given Taiwan’s limited indigenous gas reserves, LNG can be expected to continue to play a major role in meeting gas demand. LNG imports are projected to increase to 10.5 million tonnes in 2010, and 11.8 million tonnes in 2015, compared with 6.9 million tonnes in 2004. The rapid growth in the early part of the period refl ects the build up of signifi cant gas fi red power generation capacity. The projected increase in LNG imports is above existing contrac-tual levels, suggesting that there will be market opportunities for LNG suppliers in the coming years. In 2010, the additional LNG supply required by Taiwan could reach 2 million tonnes a year, rising to more than 4 million tonnes a year by 2015.

Taiwan is a well established market with the necessary infrastructure and institutional backing to sustain a growing LNG market. These attributes, together with the strong market credentials of gas users such as Taipower, should provide an attractive set of conditions to LNG suppliers considering the Taiwanese market.

Despite this, Taipower’s most recent tender process in 2001–03 attracted only limited interest from the international LNG industry. This can be partly attributed to the heightened risks created by the contractual link between supply of natural gas and access to a receiving terminal in northern Taiwan, the damages exposure related to contract termination rights and claims by third parties and recourse to the Taiwan law rather than to international law in the case of dispute resolution procedures. The compounding nature of these risks was likely to have had a negative bearing on suppliers’ decision to participate in the tender process.

Such contract conditions have the potential to reduce the number of competing suppliers by raising the risks, and hence the required rate of return on potential investments associated with LNG supply. These issues could be important in the next few years, as new regional markets for LNG exporters — such as China — emerge, and the LNG supply outlook remains tight.

Australia is one of the largest potential suppliers of LNG to the region, with a number of proposed projects over the coming decade that could potentially quadruple Australia’s current

6

34


export capacity. There are also other projects — existing and planned — in the Asia Pacifi c and Middle East that could meet Taiwan’s future LNG requirements. However, given the time required to bring LNG projects to the market, it will be important for Taiwan to commit to new supply sources soon if it is not to face an increasingly diffi cult gas supply situation in the medium term.

35

references

Ball, A., Schneider, K., Fairhead, L. and Short, C. 2004, The Asia Pacifi c LNG Market: Issues and Outlook, ABARE Research Report 04.1, Canberra, November.

Ball, A. 2005, ‘Asia Pacifi c LNG market: recent developments and emerging issues’, Austra-lian Commodities, vol. 12, no. 2, June quarter, pp. 351–60.

BP various years, BP Statistical Review of World Energy, London, June (www.bp.com).

BOE (Bureau of Energy) 2004, The Energy Situation in Taiwan, Republic of China, Ministry of Economic Affairs, Taipei, August (www.moeaboe.gov.tw).

—— 2005a, Energy Statistics, Ministry of Economic Affairs, Taipei (www.moeaboe.gov.tw).

–––– 2005b, Statement on Notable Energy Developments in Chinese Taipei, Meeting Docu-ment for the 30th Meeting of the APEC Energy Working Group, Ulsan, Republic of Korea, 24–25 August (www.ewg.apec.org).

BOFT (Bureau of Foreign Trade), Trade Statistics, Directorate General of Customs, Ministry of Finance, Taipei (eweb.trade.gov.tw).

CPC (Chinese Petroleum Corporation) 2004, Outlook of LNG demand and supply in Taiwan, Presentation at the 11th Australia–Taiwan Joint Energy and Minerals Trade and Investment Consultations, Pokolbin, Australia, 14–15 December.

—— 2005, Annual Report 2005, Taipei (eng.cpc.com.tw).

EIA (Energy Information Administration) 2005a, Reserves for Selected Countries and World Total: Most Recent Estimates, Washington DC, January (www.eia.doe.gov/emeu/interna-tional/reserves.html).

—— 2005b, ‘Taiwan’, Country Analysis Briefs, Washington DC, August (www.eia.doe.gov/emeu/cabs/taiwan.html).

Energy Argus 2005, ‘Ta-Tan plant to start two years early’, Asia Gas and Power, 22 June, p. 3.

EPA (Environmental Protection Administration) 2002, R.O.C’s Response to the United Nations Framework Convention on Climate Change: Strategies and Prospects, Taipei (www.epa.gov.tw/english/offi ces/f/unfccc.htm).

FACTS Inc. 2005a, ‘Taiwan’s latest gas situation: what can we expect?’, FACTS Gas Insights, Issue 48, June.

—— 2005b, ‘Taipower and Taiwan’s power industry: an update’, FACTS Gas Advisory, Issue 29, August.

IEA (International Energy Agency) 2005a, Energy Balances of Non-OECD Countries, IEA Data Services, OECD, Paris.

36


—— 2005b, EPT (3Q 2005): Coal and Natural Gas Import Costs and Export Prices, IEA Data Services, OECD, Paris.

MOEA (Ministry of Economic Affairs) 2005, Statistics of Economic and Trade, Taipei, (www.moea.gov.tw/english/estatistics/index.html).

Mukoyama, H. 2002, ‘Growing economic interdependence between Taiwan and China’, RIM, The Japan Research Institute Limited, Tokyo, June.

Reuters 2003, ‘Update 2 – Taiwan CPC wins $8.7 bln LNG deal’, Reuters News, 4 July.

Taipei Times 2005a, ‘Legislators demand changes to Power Industry Law’, Taipei Times, 19 February.

—— 2005b, ‘Government touts gas to cut oil reliance’, Taipei Times, 18 June.

—— 2005c, ‘Taiwan phases out all nuclear power, for coal’, Taipei Times, 28 June.

—— 2005d, ‘Taipower plans to switch to liquefi ed gas at Tatan’, Taipei Times, 13 April.

Taipower (Taiwan Power Company) 2005, Web site, Taipei (www.taipower.com.tw).

Taiwan Headlines 2005a, ‘Fourth nuclear power project to be postponed for three years’, Taiwan Headlines, Government Information Offi ce of Taiwan, 14 October.

—— 2005b, ‘Government still committed to end of nuclear power’, Taiwan Headlines, Government Information Offi ce of Taiwan, 11 January.

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37

Agricultural Production Systems Research Unit

Asia Pacifi c Economic Cooperation Secretariat

AusAid

Australian Centre for International Agricultural Research

Australian Gas Association

Australian Greenhouse Offi ce

Australian Plague Locust Commission

Australian Quarantine and Inspection Service

Australian Wool Innovation Limited

Batelle Pacifi c NW

Canegrowers

Chevron Texaco

Commonwealth Grants Commission

Commonwealth Secretariat, London

CSIRO (Commonwealth Scientifi c and Industrial Research Organisation)

Dairy Australia

Department of Agriculture, Fisheries and Forestry

Department of Business, Industry and Resource Develop-ment, Northern Territory

Department of the Environment and Heritage

Department of Foreign Affairs and Trade

Department of Health and Ageing

Department of Industry, Tourism and Resources

Department of Infrastructure, Victoria

Department of Natural Resources and Mines, Queensland

Department of Primary Industries, Queensland

Department of Primary Industries, Victoria

Department of Prime Minister and Cabinet

Department of Transport and Regional Services

Deutsche Bank

East Gippsland Horticultural Group

Exxon

Fisheries Research and Development Corporation

Fisheries Resources Research Fund

Food and Agriculture Organisation of the United Nations

Forest and Wood Products Research and Development Corporation

Grains Research and Development Corporation

Grape and Wine Research and Development Corpora-tion

GHD Services

Horticulture Australia

Independent Pricing and Regulatory Tribunal

Institute of National Affairs, Papua New Guinea

International Food Policy Research Institute

ITS Global

Land and Water Australia

Meat and Livestock Australia

Melbourne Development Institute

Minerals Council of Australia

Ministerial Council on Energy

National Land and Water Resources Audit

National Landcare Program

National Oceans Offi ce

Natural Heritage Trust

Newcastle Port Corporation

New South Wales Department of Primary Industries

New Zealand Ministry for the Environment

New Zealand Ministry of Foreign Affairs and Trade

New Zealand Ministry of Prime Minister and Cabinet

NSW Sugar

Offi ce of Resource Development, Northern Territory

Organisation for Economic Cooperation and Develop-ment

Plant Health Australia

Pratt Water

Primary Industries, Victoria

Rio Tinto

Rural Industries Research and Development Corporation

Snowy Mountains Engineering Corporation

Terrapin Australia

University of Queensland

US Environmental Protection Agency

WA Global Ocean Observing System

Wheat Export Authority

Woodside Energy

Woolmark Company

Research funding ABARE relies on fi nancial support from external organ isations to complete its research program. As at the date of this publication, the following organisa-tions had provided fi nancial support for ABARE’s research program in 2004-05 and 2005-06. We gratefully acknowledge this assistance.

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