Will Asian LNG demand bounce back?

Elevated spot market prices are likely to keep Asian LNG purchasing in check this year, but China’s recovery from its severe COVID-19 restrictions may mean more competition for the sought after fuel than expected. Longer term, Asia still has a significant coal issue to address.

ROSS MCCRACKEN

Asia accounted for 76% of the growth in LNG imports from 2012-2021. This trajectory has been knocked off course by the conflict in Ukraine and Europe’s sudden thirst for the fuel. Prices rose, leading to an estimated 15 MT drop in LNG imports to Asia in 2022.

In some countries, this has caused a major reevaluation of the role of imported gas in their energy futures and has certainly increased the incentive to invest more in renewables.

However, Asia is short on gas and long on coal, accounting for just under 23% of global consumption of the former, but nearly 80% of the latter. This basic fact is expected to underpin the region’s demand for LNG in the decade to come, and most likely longer, despite even a rapid expansion of renewable energy and/or nuclear power.

Moreover, while domestically-produced gas volumes for Asia-Pacific as a whole continue to rise, almost all of this growth is accounted for by China, which is also the country that has seen the most marked and resilient demand for LNG.

China excepted, Asia produced substantially less gas in 2020 and 2021 than it did in 2019. The developed

Asian economies have no domestic gas production to speak of and many developing Asian economies in south and southeast Asia have structural gas deficits, which are unlikely to be addressed by a rise in domestic gas output in the short to medium term.

As a result, in the medium-term, Asian demand for LNG is expected to bounce back, as more supply comes on stream and Europe reduces its overall need for gas, making spot-traded LNG more affordable.

Japan, South Korea turn back to nuclear power

Both Japan and South Korea have made major u-turns on nuclear policy in the last six months, reflecting a changed perspective on the role LNG will play in their energy mixes.

Their motivations reflect the desire for an energy source less at risk from volatility in international markets and the need to hit environmental goals, which have become more challenging as a lack of affordable gas implies a lengthier dependence on carbon-heavy coal.

In December, Japan approved a draft low-carbon energy policy which is the most pro-nuclear since the

Asia’s role in LNG import growth (bn m3)

Fukushima nuclear disaster of 2011.

Currently, the country has only seven reactors in operation, 26 remain suspended and a further 26 have entered decommissioning. Potentially operable reactors total more than 30 GW, while the capacity of those being decommissioned is just over 17 GW.

The new policy would allow nuclear plants to continue operating beyond 60 years and includes plans to build new reactors to replace those being decommissioned.

Similarly, in South Korea, the recently adopted 10th Basic Plan for Electricity Supply and Demand, under President Yoon Suk Yeol, sees nuclear power’s share of electricity generation rising from 23.4% in 2018 to 32.4% in 2030 and 34.6% in 2036, a sharp turnaround from the 9th plan produced two years earlier under former president Moon Jae-in.

Coal-fired generation will fall sharply and renewables will expand, although the 10th plan projects less renewable energy capacity in the 2030s than the 9th. Despite the greater role for nuclear in the 10th plan, coalto-gas conversions mean the country’s gas fired capacity will rise, even if actual gas burn is forecast to fall. Gasfired electricity generation is expected to account for 22.9% of total generation in 2030, falling to just 9.3% in 2036.

As all of South Korea’s gas use comes from imported

LNG, this implies a large reduction in LNG imports and an equally large amount of idle or rarely-used gas-fired generation capacity.

However, it also means that if the expansion plans for nuclear or renewable energy, or both, fall short of expectations, LNG use will be higher. Consultant Rystad Energy, for example, sees South Korean LNG demand rising to 51 MT in 2030 and 54 MT in 2040 from 47 MT in 2021.

Similar scepticism exists over the impact of Japan’s new nuclear policies, and the country is also investing in new gas-fired generation plants. Most forecasts suggest a gradual decline in LNG demand. The Energy Intelligence’s Research and Advisory Unit sees Japanese LNG demand falling from 73.2 MT last year to 67.5 MT in 2030 and 54.5 MT in 2040.

Public opinion on nuclear power in both countries is volatile and both restart and newbuild programmes can be subject to lengthy delays and cost overruns. Delivering on the nuclear targets will require consistent political backing, which is by no means guaranteed over the next decade and beyond.

Moreover, both countries still rely heavily on coal-fired generation, which generated 302 TWh in Japan and 212 TWh in South Korea in 2021. This must fall sharply, if the two countries are to meet their climate targets. Carbon

Asia’s role in LNG import growth (bcm)

RestoftheWorldAsia-Pacific

Source: BP neutrality by 2050 means coal-fired generation must be eradicated at the same time that electricity demand growth is met.

As with South Korea, Japan’s future LNG use is dependent on the success and timing of its nuclear and renewable energy expansions. Increasingly, as coal generation capacity is curtailed, LNG will be the only fallback option.

Chinese gas demand is resilient

Chinese gas demand in 2022 appears to have fallen slightly – by 3 bcm (less than 1%), according to Shell’s LNG Outlook 2023, confirming an estimate made by the National Development and Reform Commission in December based on the first ten months of 2022. The reduction marks a significant break from more than two decades of continuous growth.

The primary drivers were the economic impact of zero tolerance policies towards COVID-19, and rising international gas prices, which reduced gas demand in the transport, industrial and power sectors. Pricing also saw a shift in preference for pipeline imports over LNG, and LNG volumes supplied under long-term contract over spot LNG purchases.

However, at the same time, China has been the most active country in terms of signing new long-term contracts for LNG. This reflects the expectation of a demand rebound as economic growth recovers, a return to more aggressive gas-for-coal substitution and a desire to avoid (and potentially benefit from) spot price volatility.

The lifting of COVID-19 controls suggests the Chinese economy will see higher GDP growth this year than last and this is almost certain to result in higher gas demand. As domestic output is unlikely to rise faster than in previous years, much of the demand rebound will have to be met by imports. Given limitations on Central Asian gas imports to China and despite increased volumes through the Power of Siberia pipeline from Russia, China is expected to need more LNG this year than last. Meanwhile, China continues to expand its renewable energy capacities at a rapid rate. According to government data, China added 37.6 GW of new wind capacity last year, 6 GW offshore, and 87.4 GW of solar PV capacity. China’s National Energy Administration estimates that a further 160 GW of wind and solar capacity will be added this year.

While these are big numbers, China still has a mountain to climb in terms of its massive dependence on coal in the power sector, where gas plays a relatively minor role. Industrial and residential and commercial gas demand both outstrip gas-for-power generation in China. Moreover, even last year, residential and commercial gas demand grew by 6 bcm, according to oil and gas major Shell, which forecasts a 4-9 MT increase in Chinese LNG demand this year in its LNG Outlook 2023.

Change in global LNG trade in 2022, yoy (MT)

and Storage Units to Europe, setting back completion of the Jaigarh and Jafrabad LNG terminals.

With no other import options apart from LNG, a lack of increased gas availability looks certain to mean increased coal use, in line with 2022, which bodes ill both for India’s gas use targets and its greenhouse gas emissions.

Price remains key in Asian markets

Price will be the main determinant of whether Asian LNG demand returns to the growth trajectory seen prior to Russia’s invasion of Ukraine, but it may be some time before LNG spot prices return to more affordable levels. European LNG use was able to rise in 2022 as a result of spare import capacity. This has been boosted further by the rapid deployment of a large number of FSRUs, which notably will bring Germany, the world’s fourth largest economy, directly into the market.

Source: Shell LNG Outlook 2023

South Asia to remain a ‘residual market’

In contrast, the more price-sensitive Indian market saw LNG imports nosedive in 2022. High LNG prices which preceded Russia’s invasion of Ukraine had already had an impact on South Asian LNG imports in 2021. Then, India saw a significant rise in domestic gas production, which offset the decline in gas imports, but last year total Indian gas supply fell by 3.7 bcm.

This means that gas as a share of primary energy consumption decreased, contrary to the government’s medium-term plans. India wants gas to make up 15% of its energy mix by 2025, compared with 6.3% in 2021 and even less last year.

Spot LNG prices have fallen back in the first quarter of this year, but remain at high levels. India and other south Asian LNG importers – Bangladesh and Pakistan – have returned to the market and tenders, ignored in 2022, are finding offers.

However, South Asia is likely to remain a reluctant buyer of LNG, given the likelihood that prices will remain elevated on the back of continued high demand from Europe.

India is expanding its renewable energy capacities far quicker than Bangladesh or Pakistan, but it is also much more dependent on coal. Nonetheless, the country has seen longer-term setbacks in terms of potential LNG demand growth. It has lost two Floating Regasification

On the supply side, investment times for new LNG capacity are long and within Asia, Indonesia continues to consume more gas domestically, limiting gas available for exports.

New supply is expected to come from Qatar and the US, where gas prices have fallen back to very low levels, rather than Asia, further internationalising the latter’s LNG import slate. However, while cheap US gas is positive for LNG exports, it does not speed up the time with which new capacity can be built.

Qatar’s huge expansion of its LNG capacity is not expected to be complete until 2026/27 and it is only around this time that the LNG market is likely to find a balance at a more affordable level.

The prospect of elevated LNG prices for a number of years will limit growth in Asian LNG demand and bolster the prospects of both nuclear and renewable energy. Their more rapid growth is likely to dent pre-Ukraine crisis forecasts of Asian LNG demand. However, post2026/27, when the European LNG demand bubble starts to deflate, latent Asian demand for gas is likely to become more apparent and the problem of massive coal use will remain unresolved.

Shell predicts a growth forecast range for Asia, excluding China, of -4 to +9 MT in 2023. It sees China playing a balancing role in a newly-structured LNG market in which Europe and North Asia have become ‘premium’ markets. However, while South Asia seems certain to retain its role as a residual market, competition from Chinese buyers may prove stronger than expected.