Resources and Energy Quarterly March quarter 2012

Gas

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  Global gas consumption is projected to increase at an average annual rate of 3 per cent over the outlook period, underpinned by increasing use of gas in electricity generation.
  
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  Imports of LNG into Asia-Pacific region are projected to increase by an average of 8 per cent a year to reach 241 million tonnes in 2017. China is projected to account for a third of the total increase in the region’s LNG imports.
  
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  Projected increases in the global demand for LNG and the establishment of binding long-term contracts to secure future supplies have underpinned investment in additional liquefaction capacity. Global liquefaction capacity is projected to increase at an average annual rate of 5 per cent, to reach 366 million tonnes a year by the end of 2017.
  
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  Australia’s LNG export earnings are projected to increase by an average of 20 per cent a year to total $30 billion (in 2011–12 dollars) in 2016–17. The growth will be underpinned by higher export volumes supported by the start up of 66 million tonnes a year of additional LNG production capacity over the outlook period.
  

Over the last decade, global gas consumption increased at an average annual rate of 3 per cent and totalled 3.3 trillion cubic metres in 2010. These trends are expected to continue over the medium term, with the International Energy Agency (IEA) projecting world gas consumption to reach 3.8 trillion cubic metres by 2016. Historical and projected increases in gas consumption reflect greater use of gas in electricity generation, industrial production and in the residential sector.

Gas-fired electricity is an attractive option because it is characterised by low capital expenditure, short construction times, flexibility in meeting peak demand, and low carbon emissions relative to other fossil fuels. While the majority of global increases in gas demand are projected to be used in electricity generation, the extent of gas use in the electricity sector will depend on the price of gas relative to alternative fuels, as well as domestic policy settings regarding nuclear energy, renewable energy and carbon pricing.

The majority of incremental gas consumption is projected to occur in emerging economies, where gas-fired energy is projected to support strong economic growth. Expanding gas distribution networks are also inducing a switch away from more expensive heating fuels such as kerosene. Demand for gas in more mature OECD markets is projected to increase moderately, reflecting the increasing share of gas used in the electricity generation sector.

The majority of the world’s gas production is confined to a few regions including the Former Soviet Union, North America and the Middle East. Gas consumption, however, is more decentralised and many regions supplement domestic gas production with imports. Projected increases in global gas consumption, centralised production and associated regional price disparities are projected to underpin an expansion of global gas trade.

Investment in inter- and intra-regional transport capacity will facilitate trade and enable greater gas consumption, particularly in Asia. Greater transport capacity will take the form of additional pipelines and the construction of LNG liquefaction and regasification terminals. LNG trade in 2010 totalled 209 million tonnes and represented 9 per cent of global gas consumption, an increase from 6 per cent in 2000.

LNG is projected to comprise an increasing proportion of global trade over the medium term, as it can be transported over longer distances and allows for a greater diversification of supply compared with gas transported through pipelines.

LNG markets are of particular interest in an Australian context as the geographical distance between Australia and its export markets prevents the transportation of gas via pipelines. Australia’s LNG exports are delivered mainly to Japan, the Republic of Korea, Chinese Taipei and China. These markets accounted for over half of world LNG imports in 2010.

In 2011, world LNG trade increased by 14 per cent, relative to 2010, to total 238 million tonnes. Growth of LNG imports was greatest in the Asia-Pacific region, and is estimated to have increased by 16 per cent to total 148 million tonnes. In all Asia-Pacific economies, LNG imports are increasingly used to supplement insufficient domestic gas supplies to meet growing demand. In Japan, increases in LNG imports were underpinned by greater gas-fired electricity generation following the March 2011 earthquakes and tsunami and the subsequent closure of most of its nuclear facilities.

Asia-Pacific imports of LNG are forecast to increase by 14 per cent in 2012 to reach 168 million tonnes, supported by stronger gas-fired electricity generation and higher industrial and residential consumption in existing and emerging LNG importing economies. In 2013, growth of LNG imports into the Asia-Pacific region are forecast to slow to 8 per cent and to total 181 million tonnes. Increased LNG imports into the Republic of Korea, China, India and Chinese Taipei are forecast to offset a decline in Japan’s imports (see Figure 1).

Asia-Pacific imports are projected to constitute an increasing proportion of global LNG trade over the medium term. From 2014 to 2017, Asia-Pacific imports of LNG are projected to increase at an average of 7 per cent a year, to reach 241 million tonnes by 2017, reflecting the increasing importance of gas in electricity generation, and greater direct consumption in the residential sector and industrial sector.

Japan is currently the largest LNG importer in the world. In the absence of domestic gas production and international pipelines, Japan is completely reliant on LNG imports to meet domestic consumption requirements. In 2011, Japan’s LNG imports increased by 12 per cent, relative to 2010, to total 78 million tonnes. Robust growth in LNG imports followed the March 2011 earthquakes and tsunami that ultimately led to the closure of most of Japan’s nuclear reactors for stress tests. At the end of February 2012, only two reactors with a combined capacity of 2227 MW were operating in Japan. The remaining 49 reactors were inoperative either as the result of government imposed stress tests or because of planned maintenance. The two online generators are due to close for inspection and maintenance in the first half of 2012. Assuming local authorities allow the restart of around 15 nuclear power stations that have passed stress tests in the second half of 2012, Japan’s imports of LNG are forecast to increase by 2 per cent in 2012 and decrease by 6 per cent in 2013 to total 74 million tonnes.

Projections of Japan’s LNG imports over the medium term are largely dependant on government policies that will dictate if and when nuclear capacity is restarted. Assuming all remaining 36 reactors reopen over the outlook period, Japan’s LNG imports are projected to increase at an average annual rate of 2 per cent from 2014 to total 80 million tonnes in 2017.

Like Japan, the Republic of Korea’s supply of gas consists entirely of LNG imports. In 2011, the Republic of Korea’s imports of LNG increased by an estimated 12 per cent to total 33 million tonnes, underpinned by a rise in gas use for electricity generation and growing consumption of residential and commercial gas. In 2012 and 2013, the Republic of Korea’s LNG imports are forecast to increase by 7 per cent to total 38 million tonnes in 2013. Increasing imports reflect an expectation that gas will continue to play a critical role in peak load electricity generation and the implementation of a policy designed to expand the gas distribution network. Over the remainder of the outlook period (2014 to 2017), however, fewer proposed expansions of power generation facilities will moderate the growth in gas in the electricity sector. Furthermore, infrastructure expansions designed to increase residential and commercial access to gas early in the outlook period are projected to reduce potential growth in LNG consumption towards the end of the outlook period. From 2014 to 2017, the Republic of Korea’s LNG imports are projected to increase at an average annual rate of 2 per cent to total 42 million tonnes in 2017.

China’s gas consumption is projected to rise from 112 billion cubic metres in 2010 to reach 260 billion cubic metres by 2015. According to the IEA, the Chinese Government is aiming to increase the share of gas in domestic energy consumption to 8 per cent in 2015, by promoting its use in transportation, electricity generation and for residential use. While Chinese state-owned oil firms are focusing on developing domestic gas supply to meet rising demand, the IEA projects that China’s gas production will equate to around half of the growth in domestic consumption. The remaining component of demand is likely to be met by increasing imports.

In general, pipelines are the most cost effective means of importing gas into China. Pipelines are extensively used to import gas into China’s northern and western provinces. However, in the southern and eastern provinces, the long distances to gas-consuming centres via pipeline make LNG imports more cost effective. Regasification capacity is expected to constrain increases in China’s LNG imports over the outlook period. In 2012, China’s LNG imports are forecast to increase 30 per cent to total 16 million tonnes, reflecting additional capacity at the Zhejiang Ningbo and Dalian facilities. In 2013, LNG imports are forecast to grow by an additional 13 per cent to total 19 million tonnes. Increases in LNG imports are forecast to be supported by the expected commissioning of the Zhuhai Jinwan and Tangshan facilities, but will be moderated by the completion of the Myanmar-China pipeline. Between 2014 and 2017, several additional LNG projects are scheduled to start up underpinning China’s LNG imports over medium term. Combined, these projects are expected to support 37.3 million tonnes of LNG imports into China in 2017.

India’s gas consumption is projected to increase over the medium term, due to increased gas use in the electricity and industrial sectors. Greater gas consumption will need to be met by increases in domestic production and imports. In 2012, India’s domestic gas production is forecast to fall as a result of continued operational problems in the Krishna-Godavari Basin. While India is expanding pipeline capacity over the medium term, LNG imports are forecast to supplement supply in the short term. In 2012, LNG imports into India are forecast to increase by 19 per cent, relative to 2011, to total 13 million tonnes. Increases in LNG imports will be supported by growth in India’s regasification capacity.

Between 2013 and 2017, imports of LNG into India are projected to increase at an average annual rate of 5 per cent to reach 16 million tonnes in 2017. Over the medium term, growth rates of India’s LNG imports are projected to ease as additional pipeline capacity is constructed.

Demand for LNG in Chinese Taipei is projected to increase over the medium term, as a result of a change in the government’s energy policy announced in November 2011. The Chinese Taipei government has proposed to phase out nuclear power in response to the March 2011 earthquakes and tsunami in Japan. The commissioning of the 2700MW Lungmen nuclear plant has been delayed until 2014 to allow more time to conduct strict safety checks. In the meantime, gas-fired electricity generation capacity is assumed to operate at a higher utilisation rate to meet increasing electricity demand. In 2012, LNG imports into Chinese Taipei are forecast to increase 7 per cent to 13 million tonnes. From 2013, Chinese Taipei will be entitled to an additional 1.5 million tonnes a year from Qatar under contract, reducing spot market demand. Between 2014 and 2017, additional demand for gas will reflect the possible closure of nuclear electricity generating capacity and its substitution with gas-fired capacity. During this period, LNG imports into Chinese Taipei are projected to increase 6 per cent a year to reach 17 million tonnes in 2017.

Imports into the Asia-Pacific region are expected to be further supported by growing demand from Asian economies that, prior to 2011, did not import LNG. These countries include Thailand, Malaysia, Singapore and Vietnam. Combined, these nations are projected to import 25 million tonnes of LNG by 2017.

Growing world LNG supply to be underpinned by Australian liquefaction capacity

Projected increases in the global demand for LNG and the establishment of binding long term contracts to secure future supplies have underpinned investment in additional liquefaction capacity. Given long construction times, projections of global liquefaction capacity growth over the outlook period are based on projects that are either committed or under construction. In 2012 and 2013, global liquefaction capacity is forecast to increase by 3 per cent each year to reach 296 million tonnes a year in 2013, underpinned by projects in Australia, Angola and Algeria. Over the remainder of the outlook period (2014 to 2017), global liquefaction capacity is projected to increase at an average annual rate of 5 per cent, to reach 366 million tonnes a year by the end of 2017 (see Figure 2).

As of February 2012, 14 liquefaction projects were committed or under construction around the world, eight of which are located in Australia. Australia LNG liquefaction capacity is projected to increase four fold over the outlook period to total 85 million tonnes in 2017. Most of this additional capacity is scheduled to come online after 2014.

In 2012, Australia’s liquefaction capacity is expected to increase to 24 million tonnes a year, with the completion of the first train at the 4.3 million tonne Pluto project. Between 2014 and 2015, three coal seam gas LNG projects, with a combined capacity of 25 million tonnes, are scheduled to start up: the Australia Pacific LNG project (APLNG), the Queensland Curtis LNG project and the Gladstone LNG project. While funding has only been committed for the first train of the APLNG project, a positive foreign investment decision is assumed on the second train in the first quarter of 2012, given the establishment of binding sales and purchase agreements. The remaining LNG projects scheduled for completion include Gorgon (15 million tonnes, in 2014/15), Wheatstone (8.9 million tonnes, in 2016), Prelude (3.6 million tonnes, in 2016/17) and Ichthys (8.4 million tonnes, in 2016/17).

New liquefaction facilities are also being constructed in Papua New Guinea (PNG), Indonesia, Algeria and Angola over the outlook period, with a combined capacity of 23 million tonnes a year.

In 2012, Angola’s first LNG project, Angola LNG, is expected to be completed, with a production capacity of 5.2 million tonnes a year. Algeria’s LNG production capacity is expected to increase by 9 million tonnes following the completion of the Gassi Touil LNG project and a new train as part of the Skikda project in 2013. In 2014, the PNG LNG project and the Donggi Senoro project in Indonesia are due to be completed, with a capacity of 6.6 million tonnes and 2 million tonnes, respectively.

Box 1: North American LNG export potential and the Panama Canal expansion

Increasing production of unconventional gas in the US in recent years has increased the domestic supply of gas, and put downward pressure on local prices. As of November 2011, US LNG import prices were around US$4 per MBtu, an estimated discount of US$5-8 per MBtu relative to Europe, and US$13 per MBtu relative to Japan (see Figure 3).

While the price disparity between the Atlantic and Asia-Pacific LNG markets will encourage LNG re-exports from North America to Asia, the cost and time of transportation around the Cape of Good Hope is a limiting factor.

These transportation costs will be reduced in 2014 when a US$5.3 billion expansion project for the Panama Canal is due to be completed. The project is expected to increase the width of the canal, allowing it to accommodate LNG vessels transporting LNG from the Atlantic market to the Asia-Pacific market. The expansion is likely to reduce transport costs and travel time to the Asia-Pacific market.

The growing regional gas price disparity over recent years, combined with plans to widen the Panama Canal, have increased the attractiveness of investment opportunities in the US to re-export LNG, and to export domestically produced LNG. Several companies have received federal government approval to re-export LNG, after it is imported in accordance with long-term contracts and minimal operational requirements.

The Sabine Pass Liquefaction project, the Freeport LNG expansion project and the Lake Charles Exports project are the most advanced of proposed US LNG export proejcts. Cheniere Energy entered into sales and purchase agreements to supply customers in the Republic of Korea, India, the UK and Spain with a total of 16 million tonnes of LNG a year from the Sabine Pass facility. If the Sabine Pass, Freeport and Lake Charles projects proceed as scheduled, the US could become a net exporter of LNG by 2016.

Meanwhile, Canadian exporters of LNG are looking to diversify their exports markets, as the import needs of the US decrease. Apache has gained approval from Canada’s National Energy Board to export 5 million tonnes a year from its proposed Kitimat plant and the LNG Group has gained approval to export 2 million tonnes from its proposed BC LNG facility from 2014.

Given that final investment decisions have not been reached on any of these new US and Canadian liquefaction projects, their additional liquefaction capacity has not been taken into account in this medium term projection.

In 2011–12, Australia’s gas production is forecast to increase by 5 per cent to 56 billion cubic metres. Increases in production are expected to be underpinned by the commissioning of a number of new fields. In December 2011, production from the Reindeer field in the Carnarvon Basin commenced. Production from the Xena and Pluto fields, which will supply the Pluto project, is expected to commence in the first half of 2012.

In 2012–13, the first stage of the Kipper/Tuna/Turrum project in the Gippsland Basin and the Macedon project in the Carnarvon Basin are scheduled for completion. These projects are expected to underpin an additional 13 per cent increase in Australian gas production in 2012–13 to total 63 billion cubic metres.

Over the remainder of the outlook period (2013–14 to 2016–17), Australia’s gas production is projected to increase at an average annual rate of 22 per cent, to reach 137 billion cubic metres by 2016–17. Increased gas production is projected to be facilitated by new LNG capacity as well as demand for gas from the electricity generation, industrial and residential sectors.

Australian exports of LNG are forecast to decrease by 2 per cent in 2011–12 to total 20 million tonnes, reflecting planned maintenance at the North West Shelf LNG plant in the second half of 2011 and at the Darwin LNG plant in the second quarter of 2012. Lower production as a result of maintenance is forecast to offset new production from the commencement of operations at the Pluto facility in the first quarter of 2012. In 2012–13, Australian exports are forecast to increase by 19 per cent to total 23 million tonnes, as production at the Pluto facility is scaled up towards capacity.

Over the remainder of the outlook period (2013–14 to 2016–17), Australian exports of LNG are projected to increase at an average rate of 31 per cent a year to reach 63 million tonnes in 2016–2017 (see Figure 4). Projected increases in export volumes are expected to be underpinned by the commissioning of several LNG projects that are currently under construction, as shown in Table 2.

Australia’s two existing LNG projects are located on the north and western coast of Australia, linking Australia’s western domestic gas market to international LNG markets. As a result, domestic prices in Australia’s western market are close to parity with exports.

The lack of LNG terminals on the eastern coast of Australia, in conjunction with a number of domestic suppliers, has limited price increases in Australia’s eastern gas market. At present, domestic gas prices in the eastern market are well below prices in the Asia-Pacific LNG markets.

Three LNG projects using coal seam gas are under construction and are expected to start production in Queensland between 2014 and 2017. Once operational, these projects will connect Australia’s eastern gas market to the Asia-Pacific market, increase demand for domestically produced gas, and allow domestic prices to converge towards export parity over the longer term.

LNG prices under long-term contracts in the Asia-Pacific are generally linked to the price of oil. In 2011–12, higher forecast oil prices are expected to support higher LNG prices. Increasing LNG prices, combined with increasing export volumes, are forecast to underpin growth of 8 per cent in Australian LNG export earnings to total $12 billion in 2011–12

Over the medium term, real LNG prices in the Asia-Pacific region are projected to ease in line with lower projected oil prices, greater supply of LNG from North America and expanding liquefaction capacity in Australia. Nevertheless, between 2012–13 and 2016–17, Australia’s export earnings are projected to increase by an average of 22 per cent a year to total $30 billion (in 2011–12 dollars) in 2016–17. Increases in export earnings are projected to be underpinned by significant increases in Australian export volumes, which are expected to offset the effect of moderating LNG prices.