Author: Darrell Stonehouse

Asia-Pacific gas demand is forecast to grow by at least 50 per cent by 2040, but only the lowest cost LNG suppliers will win a piece of this demand, according to a just released Evaluate Energy Briefing Note: Linking North American LNG Supply to Asia-Pacific Markets.

Because Asia-Pacific countries have sustained demand, they want to enter or renew long-term contracts to ensure lower cost supply, rather than taking the European approach of shorter-term contracts or relying on spot cargoes from portfolio players.

As of 2023, 146 long-term contracts, covering 195 mtpa of volume, exist in Asia. These totals will drop to 96 contracts and 146 mtpa by 2030.

“This will create an interesting moment for pricing as Qatari, U.S., Australian and Canadian capacity comes online during this period,” said Tom Young, author of the Briefing Note. “Qatari and Australian sellers seem committed to oil indexation, despite the increasing disconnection between oil and gas markets. Asian buyers will want the cheapest prices possible, and to avoid getting caught in a repeat of the scramble for expensive spot cargoes that took place in 2022.”

One recent bellwether is the deal signed between QatarEnergy and Sinopec, said Young. The 27-year deal is for 4 mtpa, one of the longest contract durations in the sector.

There are other price-sensitive buyers in Asia that are likely to become increasingly significant LNG importers, including India, Vietnam and Bangladesh.

“Traditionally India has been an opportunistic buyer, only willing to enter the market at US$10/mmBtu or below,” said Young.

While industrial demand provides a base for LNG imports in Asia, the power market will provide most growth going forward. LNG exports must be competitive with other energy sources including coal and renewables. The analyst consensus is LNG is competitive in emerging markets at under US$10/mmBtu.

Suppliers like Canada will compete on cost

LNG supply costs depend on facility capital costs, upstream gas supply costs, midstream liquefaction costs, and transportation costs. Most exporters are advantaged or disadvantaged in at least some of these areas.

“For example, Canada has higher upfront costs than a comparable facility on the U.S. Gulf Coast. It also has significantly higher upstream transportation costs to pipe gas to liquefaction facilities,” said Young. “However, Canada’s liquefaction costs are lower due to its cold climate, and it also has a geographic advantage in reaching Asian markets (see graph below).”

A recent Canadian Energy Centre study shows Canada in the middle of the pack when it comes to upstream natural gas supply costs. The Canadian natural gas sector had a weighted average breakeven gas price of US$2.31/mcf in 2022, fifth lowest among major natural gas producing countries, behind Saudi Arabia ($1.09/mcf), Iran ($1.39/mcf), Qatar ($1.93/mcf) and the United States ($2.22/mcf).

However, the Montney play where LNG supply will be sourced had a breakeven price of $1.49/mcf, lower than the largest LNG exporters in the world — Qatar and the U.S.

 

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The Ukraine war has brought energy affordability and security to the forefront, with countries around the world looking to lock-in long term supply for industrial feedstock and electricity generation.

With its lower carbon dioxide emissions compared to coal, natural gas demand is growing in Europe as countries look to replace Russian supply while managing climate change commitments. In the Asia Pacific, demand is increasing for petrochemical, fertilizer, steel, and cement production to meet economic growth targets, along with increasing public demands for reliable, affordable electricity.

Increasing gas demand is resulting in a boom in LNG related infrastructure construction, according to a new Evaluate Energy Briefing Note entitled: Linking North American LNG Supply to Asia-Pacific Markets.

Construction of regasification facilities saw a major jump in Europe in 2022, with 20 mtpa added as Russian gas was removed from the market, according to Evaluate Energy data.

EU import capacity is set to expand by one-third by the end of 2024, according to the U.S. Energy Information Administration (EIA). Germany expects to have six terminals operational by the end of 2023 capable of processing 3.7 bcf/d. Another 4.9 bcf/d of capacity is planned or underway across the EU.

Asia-Pacific is expected to add around 230 mtpa in regasification capacity by 2030, an increase of almost 42 per cent. In China, 8.5 bcf/d of new regasification capacity is being built. India expects 1.3 bcf/d of capacity to be online by the end of 2023.

About 80 per cent of new LNG supply between now and 2030 will be from Qatar and the U.S., with Qatar adding 48 mtpa of liquefaction and the US adding nearly 96 mtpa, according to Evaluate Energy data. Other countries adding liquefaction capacity include Mozambique (20 mtpa), Canada (16 mtpa) and Australia (12 mtpa), assuming all active projects reach completion according to current plans.

By 2030 North America will have almost 40 per cent of global LNG production capacity, positioning it to be the major supplier of gas to Asia.

“This new supply will reshape global trade flows,” said report author Tom Young. “Portfolio players and trading houses will look to optimize their portfolios by taking a multi-basin approach, meaning that they will use sources of supply from various contracted volumes around the world to meet both short- and medium-term demand, minimizing the number of long journeys taken by vessels without cargoes, rather than the more traditional approach of point-to-point contracts.”

 

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