Finbarr Bermingham reports on the growth of gas in Asia – and why the key to expansion might lie in new entrants to the market.
When Yuji Kakimi talks, people in the energy industry tend to listen. As president of Jera, a joint venture between two of Japan’s biggest power companies that was set up in 2015 to buy fuel, he runs the largest procurer of liquefied natural gas (LNG) in the world.
In an interview with the Financial Times recently, he spoke of a “golden age” for gas in Asia, a time when LNG is affordable for all countries and when companies in the sector are more free to buy supplies on a flexible basis, rather than the long-term, locked-in deals which have become the norm. This utopian vision is, undoubtedly, part of his long quest to liberalise the market and wrestle power from the producers, which have dictated how things work for most of the market’s lifespan.
But speaking to others that work in LNG in Asia Pacific, there is a sense that a pan-Asiatic era is not far away: one where Asia is an export and import hub for LNG, replacing coal and oil as the fossil fuel of choice, and developing Asia weans itself off cheap, dirty energy.
Strictly speaking, this is not the first time a golden age for Asian gas has been discussed. Indeed, a cursory glance at the market data shows just how important Asia has become to the LNG industry. After the financial crisis and the Fukushima nuclear disaster in Japan, Asian companies started to dominate the LNG market. Japan, in particular, inked offtake agreements all around the world, as it sought to phase nuclear out of its energy mix.
Now, the world’s top seven buyers of LNG are Asian companies: Jera (Japan), Kogas (Korea), China National Offshore Oil Corporation, CPC Corporation (Taiwan), Tokyo Gas, Kansai Electric and Osaka Gas (all Japan). Japan is the top LNG importing country, while China last year overtook South Korea to become the second biggest, with Taiwan in fourth position.
A good portion of the LNG being used in these markets comes from the mega-projects financed in Asia Pacific between 2009 and 2016. In December 2009, the Papua New Guinea LNG (PNG LNG) project signed loan commitments for US$14bn with a group of export credit agencies (ECAs) and commercial banks, making it the largest energy project financing ever at that time. That was overtaken in 2012 by the Ichthys deal in Australia, when eight ECAs and 33 commercial banks lent US$20bn to what remains the largest project financing ever.
Other mammoth transactions over the period include the US$8.5bn project finance secured for Australia Pacific LNG (APLNG) by Origin Energy, for a facility in North Queensland, and the Tanggung deal in 2016, worth US$8bn, which was the first in Indonesia to be financed by both international and domestic banks.
Daniel Mallo, head of energy, infrastructure, metals and mining, Asia Pacific at Société Générale, worked on all of those deals. He says that there’s nothing on that scale in the pipeline. “We have all the volumes coming from Papua New Guinea, Indonesia and Australia, but if we look beyond that generation of supply, there’s likely to be a low for a few years. There’s not that many projects in the process of construction, or looking to clear final investment decision,” he tells GTR.
But Mallo, like most in the sector, is bullish on LNG in Asia: it’s just that the next boom will be different than the last. Major markets, such as Japan and Korea, already have their importing infrastructure in place, while the export hubs in Australia are already in production – the infrastructure for LNG is capital intensive, but it’s one-off work.
The view now is that the projects to be banked will be in emerging markets, where Asian countries will become new buyers and sellers of LNG. These builds will be smaller import terminals that degasify the LNG, which is cooled to 162°C so that it can be transported in liquid form. None of these projects will cost US$20bn, but there will likely be many of them, meaning infrastructure project work for the industry for years to come.
“China is growing very quickly and is expected to continue to do so over the next few years, potentially doubling or tripling its LNG imports over the next five to seven years,” Mallo says. “We also expect to see a number of new markets that don’t import LNG today, starting to import LNG. The common view is that there may be as many as 20 new LNG importing countries by 2025. The majority are likely to be in Asia: the Philippines, Thailand, Indonesia, maybe more frontier markets like Myanmar, Sri Lanka, India are going to grow, so clearly Asia will play a big role.”
The rise of China
In Hong Kong, it is not uncommon for a sickly haze to envelop the dozens of skyscrapers that dominate the skyline. More often than not, the cause is pollution drifting over from industrial centres in Mainland China. In China itself, air quality warnings are commonly issued by the government, with schools and workplaces closing when the smog surpasses a certain level of toxicity.
It’s little wonder the government scrapped plans to build 103 coal-fired plants across 13 provinces in January 2017. In total, 120GW of future capacity was halted and 52GW of this was already under construction.
As 2017 came to a close, though, what was generally considered by the environmental lobby to be a laudable move took a disturbing turn. Rather than fail to reach its own environmental targets, the Chinese government accelerated the conversion from coal to gas before it had the requisite infrastructure to convert enough LNG to energy to cater for power demands in the target areas.
While the skies in Beijing were unseasonably blue in the last quarter of 2017 – there was 54% less smog than the same period in 2016, according to Greenpeace – people were freezing in their homes outside the capital. “We are frozen to death, please help us,” wrote one netizen on the social network Weibo, the BBC reported at the time.
The government made an about-face, turning the coal power back on in 28 cities to avert the crisis, but the direction it has taken is clear: gas will usurp coal as the fuel of choice in Chinese industrial and municipal consumption, and the country is already hoovering up reserves to accommodate the shift.
“It has been interesting to see how China has changed the structure of the LNG market,” says Stefan Ras, head of energy for Asia Pacific at ABN Amro. “China is now the second largest importer of LNG in the world, with demand increasing by nearly 50% in 2017. Buyers in China have tended to make spot purchases of LNG more frequently than buyers in the traditional LNG markets, where longer-term oil linked contracts have typically been preferred in the past. We expect Chinese LNG demand to continue growing, and for China to remain as one of the key consumer markets driving the global LNG market going forward.”
In 2019, the Power of Siberia – a giant 3,000km-long gas pipeline, the cost of which has ballooned to almost US$10bn from the US$7.8bn originally estimated – will start pumping gas from Russia’s remote north to China’s far east. With an export capacity of 38 billion cubic metres (bcm) per year, the offtake will fill a gap in China’s energy mix.
According to the China National Petroleum Corporation (CNPC), however, the country’s gas consumption will rise by 10% in 2018, with imports set to grow 13.4%. Gas demand will hit 258.7 bcm this year – the Russian pipeline will only cater for a fraction of this. The reality is, as it has been with many commodities, China will keep buying gas, frozen or otherwise. Its economy is still growing strongly and its power needs are soaring. We can expect to see Chinese buyers all over the world.
In February, despite the building rhetoric over a US-China trade war, state-owned CNPC agreed to import 1.2 million tonnes of LNG a year until 2023 from US supplier Cherniere. The US commerce secretary Wilbur Ross called on China to buy even more from the US as a means of cutting the trade deficit, saying: “China needs to import very, very large amounts of LNG and from their point it would be very logical to import more of it from us, if for no reason other than to diversify their sources of supply. It would also have the side effect of reducing the deficit.”
Justin Tan, projects partner at Clyde & Co in Singapore, is in touch with “a lot of Chinese state-owned enterprises that are looking for upstream gas projects in Indonesia”.
He tells GTR: “They’ve been looking at these projects for over a decade. It all got a little bit stuck but is moving again now and we’ve been getting a lot of inquiries on those projects. It’s obviously not possible to build a pipeline from Indonesia to China, so it will have to be transported in the form of LNG.”
China is, therefore, likely to have a huge influence on LNG prices and demand. But international banks and law firms can find it difficult to be involved in Chinese projects. The capital often comes in subsidised form from the policy banks, while the administrative work around the deals is now increasingly being done by Chinese lawyers.
Instead, industry figures are pinning their hopes on new market entrants. For a country to start importing LNG, it needs to invest heavily in infrastructure, including a terminal to receive the LNG, a facility to convert the fuel back to gas, then a plant to convert that into power. As China found out last year to its detriment, getting that power onto the grid doesn’t happen overnight, either.
“Smaller projects in the form of floating regasification and storage units (FSRUs) in South and Southeast Asia are popping up. You’ve got projects in places like Myanmar, Bangladesh and Sri Lanka, where people are looking to change their current fuel use to supply their demand,” says Andrew Zaw, local principal at law firm Baker McKenzie’s Singapore office.
In Bangladesh, Pakistan, the Philippines and Thailand, gas has traditionally played quite an important role in the energy mix. However, with dwindling indigenous supplies, they are seeking to keep their inventory of gas-fired plants going with the addition of FSRUs to convert imported LNG. For other countries, such as Sri Lanka and parts of India, gas is a new option, with the stabilising price (due to supply coming online from the mega-projects in Australia and the US) and pressures of climate change bringing it into the realms of reality.
“It would be great if one day everything was renewable, but for now this is the best solution for generating power on a large scale. We see a lot of activity in emerging markets. There are projects ongoing and in the pipeline in the Philippines, Indonesia, Myanmar and Vietnam. An LNG-to-power solution is great for an emerging market,” says Ton van den Bosch, a maritime infrastructure partner at Ince & Co, a law firm that is involved in 70% of FRSU builds worldwide.
He says that typically these follow traditional project financing structures. Japanese and European banks remain big in the space, confirms Mallo at Société Générale, who is currently working on projects in Indonesia, Bangladesh and Thailand. Often, multilateral development banks will come in on a deal to offset some of the risk involved.
“Western banks can struggle with the country risk,” van den Bosch says. “Most of the action is in countries where credit committees of banks may be concerned. If you look at somewhere like Pakistan, there’s the risk of natural disasters, terrorism, change in regulations, even a coup d’état. All of these make that country higher risk than, say, Finland.”
In both Bangladesh and Pakistan, the Asian Development Bank (ADB) has been involved in the early LNG projects. In 2015, it approved a US$30mn project loan to Engro Elengy Terminal, a special purpose company, to build Pakistan’s first LNG regasification terminal. Last year, it approved debt financing and partial risk guarantees totalling US$583mn to develop a Reliance Industries Bangladesh LNG and power project. The project involves the construction of both a terminal and a regasification terminal.
It is these sorts of projects which will propel the industry. LNG infrastructure is labour and capital intensive. Queensland is enjoying the fruits of record gas exports to Asia now that its projects are online, but its labour market has yet to recover from the closure of several huge sites. Tenders will, therefore, be hugely competitive region-wide, while exploration companies will continue to look for new gas reserves to keep the cycle going.
“I wouldn’t say we are already in the golden age, but on the cusp of entering it,” says Tan at Clyde & Co, when asked about Japanese gas guru Kakimi’s views. Not everyone can yet afford to fuel their countries with LNG, but Tan is predicting that in the near future, most countries in Asia will.
“Gas will become the default fossil fuel: it’s cleaner, easier to transport, and with heavy investment it brings higher level, more sophisticated and better paying jobs for the economy – and that has a positive knock-on effect for everyone.”