No stopping for Asia's LNG

Ben Smith (Singapore) and Penny Cygan-Jones (UK), Norton Rose Fulbright, explain why the Asian LNG market will be increasingly important to the global LNG industry in the future.

Demand for natural gas in the Asian region is expected to be robust for the foreseeable future. In China, for example, S&P are predicting that gas demand will grow to 430 billion m3 in 2025 and China is expected to add 17 million t of LNG receiving capacity in 2021. An important element of that expansion in demand is the transfer of LNG terminals to PipeChina from the major Chinese energy companies. PipeChina’s mandate is to open up third party access to its terminals and pipelines, and it is expected that a broader range of Chinese buyers will be seen in the international LNG market, as well as higher utilisation rates of LNG and gas infrastructure. The underlying increase in gas demand reflects that China has emerged from the COVID-19 pandemic with strong economic growth. China is generally expected to overtake Japan this year as the largest market for LNG cargoes. Japan’s gas demand reflects that the Japanese economy is seeing little growth, but with the

reduction in the use of coal in the fuel mix (as discussed next), most expectations are that Japan will continue to be an important market for LNG.

India has relied more on the purchase of spot cargoes than almost any other importer, and 2021 has seen both the vulnerabilities and the advantages of that strategy. In January, Indian spot buyers were fully exposed to high spot prices for February deliveries, which reached US$32.494/million Btu. These prices, although short-lived, represented multiples of the prices available for term cargoes. However, in more recent months as the Delta variant of the COVID-19 virus has devastated the Indian economy, this strategy has worked to their advantage – cargoes have simply not been purchased even at the end of a tender process. It will be interesting to see what the lessons from this experience will be for the Indian buyers. Will they feel vindicated by the flexibility that their spot cargo procurement strategy gave them in the depths of the pandemic, or will they commit to more term contracts as Indian demand for gas grows?

Growth of interest in green LNG and greenhouse gas emissions regulation

The Asian region has, like the rest of the world, been taking an increasing interest in efforts to reduce climate change, and to cut emissions of greenhouse gases (GHG).

At a governmental level, most of the key markets for LNG in this region have committed to swingeing cuts to GHG emissions in accordance with the principles of the Paris Agreement: Japan has committed to be carbon neutral by 2050 (with reductions of 26% of carbon emissions on 2013 levels by 2030), and Korea has similarly pledged neutrality by 2050 (and has also pledged reductions of 24.4% of carbon emissions on 2017 levels by 2030). China has promised to reduce its carbon intensity by 65% on 2005 levels by 2030, with neutrality by 2060, and Taiwan has committed to at least a 50% cut from 2005 levels by 2050. Across the globe, 75% of the current LNG demand is in countries that have now pledged to achieve carbon neutrality.

As renewables projects are developed in many of these markets, and for some there will be significant challenges to rolling out large scale renewables, it is likely that gas will continue to play a very important part of the energy mix. The first and most obvious step that Asian countries are taking is to reduce their dependence on coal-fired power generation.

Coal has been a mainstay of power generation in this region – Korea for instance produces 40% of its power from coal-fired generation. Most economic plans see the share of fossil fuels in the energy mix being reduced (from 77% to 56% by 2030 in the case of Japan), but within that mix, the share of gas remains relatively steady. In the Japanese plan, the LNG share of 38% of the fuel mix in 2018 - 2019 falls to 27% by 2030 - 2031, but whilst this represents a fall in percentage terms, the Institute of Energy Economics Japan has estimated that this could lead to an increase in LNG demand of up to 22 million tpy by 2030 as energy demand increases overall.

The current lack of renewable alternatives may partially explain why this region has seen arguably more effort to ‘green’ the supplies of LNG being delivered to it than other regions. It has been argued that when considering all the emissions along its supply chain, US LNG is only “marginally better” than the use of coal, so it is the identification and mitigation of those emissions that are now becoming a big focus for decarbonisation efforts. The first procurement exercise for LNG has recently been seen, where the GHG emissions associated with the delivery were identified as a factor the buyer would consider when choosing a supplier. It is reasonable to expect that this will become more common, and LNG producers are now taking steps to be able to compete for buyers based on their carbon credentials.

In the last 12 months, most of the Japanese buyers have been buying spot cargoes of green LNG from suppliers such as Shell, Total, and BP. In Singapore, Pavilion Energy has attracted headlines for announcing a tender process for green LNG in early 2020, and that process has since resulted in the announcement of three long-term supply contracts, with Qatar Gas Trading, Chevron, and BP.

‘Green LNG’ is a label affixed to any LNG cargo that does anything to address the GHG emissions associated with its delivery, but when one looks at the detail of these sales and other initiatives being taken in the industry, it is clear a variety of approaches are being taken. Not all green cargoes are equal, and those sellers of cargoes with the lowest carbon footprint are rightly calling for standardised industry measurements to enable cargoes to be compared and perhaps priced accordingly.

The spot cargoes being delivered are perhaps better described as being ‘approximately’ carbon neutral, in the sense that the emissions associated with them have been offset by the retirement of carbon credits. Exactly what emissions are included is again an area of some variety; with some parties offsetting the GHG emissions associated with only the production, liquefaction, and transport of the LNG to the discharge terminal and others also looking at the emissions associated with the combustion of the gas (i.e. scope three emissions as defined under the Greenhouse Gas Protocol).

Another variable is how the emissions are calculated; there have been a number of databases produced that purport to set out the emissions associated with each LNG production facility in the world. By taking the emissions set out in the database and offsetting that emission, the parties involved in the sale and purchase of that cargo can claim to have produced green LNG. This approach has the merit of making it relatively easy to offset emissions against a publicly available quantification of emissions.

The alternative approach (‘carbon transparent’), perhaps better suited to term contracts, is to develop a methodology to determine the actual emissions associated with the delivery of each cargo, and to incentivise the seller to reduce the emissions. By drilling into actual production data rather than relying on third party databases which may be based on relatively generic information, the investment in carbon reduction measures can be incentivised. Whether there is, in addition, an offset may be up to the party that ultimately burns the gas, but the data will be there for that buyer to purchase and retire an appropriate number of carbon credits.

It is interesting to speculate on how the markets for green or carbon transparent LNG will develop, but the consequences are potentially wide ranging: Does the variety of methodologies for quantifying emissions, and the variety of standards associated with carbon credits, lead to a fracturing of trading markets for green LNG and reduce market liquidity? What are the possible liabilities that a producer exposes itself to by warranting the emissions associated with the production of gas? What liabilities may arise for LNG traders relying on warranties given by those further up the production chain?

If emissions have not been properly recorded and offset, what is the appropriate measure of the resulting loss? Is it the difference in value between ‘green’ LNG and ‘regular’ LNG, or the cost of offsets, or, particularly in the current regulatory climate, is there no loss at all because offsets are not mandated?

What will the impact of these offsets be on the market for carbon credits?

Of course, all of these points will be up for negotiation and new contractual models may appear in the absence of regulatory requirements which provide a risk allocation framework for parties to follow.

Development of new markets in Asia

Domestic gas supplies in most of the countries of South East Asia are declining whilst the expectation is that demand will increase strongly. This is certainly the case in countries such as Pakistan, Bangladesh, Thailand, Vietnam, and the Philippines. LNG is seen as a low-cost replacement for domestic gas. LNG import facilities are being developed or significantly expanded in all of these countries.

Bangladesh

There are predictions that Bangladesh will move from importing 4.1 million t of LNG in 2020 to 21.2 million tpy by 2030 and 30.8 million tpy by 2040. In the last year, however, Bangladeshi demand for LNG has declined. This is likely to be a reflection of the impact of COVID-19 on the economy, but there is an expectation that demand will increase strongly as more power plants are converted from gasoil to natural gas, and there are reports that a new natural gas transmission pipeline has been completed to facilitate the transport of gas from receiving terminals to demand centres. There has been talk of a new land-based terminal to support the expected increases in demand, but at the time of writing the status of this project is unclear.

Pakistan

Similarly, Pakistan is predicted to import 25 million tpy of LNG by 2040 and there has been much discussion of multiple floating and land-based receiving terminal projects, particularly in and around Port Qasim. These would supplement the existing Elengy and Gasport terminals but Final Investment Decisions (FID) in respect of the new terminals have not yet been announced. It is reported that there are issues associated with pipeline capacity and objections from the Pakistani navy to the proposed locations of the new terminals.

Philippines

The news from the Philippines is more positive: local power company First Gen has partnered with Tokyo Gas to develop a floating LNG terminal in Batangas, which is currently under construction.

Thailand

Thailand has seen significant regulatory change, with PTT no longer having the exclusive right to import LNG to Thailand. EGAT and Gulf Energy are now looking to enter into their own international LNG procurement agreements. This is likely to see more LNG brought in through the Map Ta Phut terminal and the development of other smaller terminals in Thailand.

Myanmar

After a number of LNG import projects for Myanmar were proposed and abandoned, a joint venture of VPower of Hong Kong and China National Technical Import & Export Corp. successfully commissioned a floating terminal near Yangon in 2020. With the current political turmoil in Myanmar it is not clear whether the terminal is continuing to operate but AIS data indicates that the vessel is still on station in Myanmar.

Vietnam

In Vietnam, there could be as many as 17 different LNG terminal proposals, but it is highly unlikely that all will be built in the foreseeable future. There have been a number of Memoranda of Understanding signed forming joint ventures to develop import projects. There is at least one proposed terminal that is intended as part of the development of a greenfield liquefaction project in the US.

Vietnam is making big strides to address some of the structural issues that have prevented LNG terminals being built there in the past, such as controls on the price of gas and power. The geography of Vietnam lends itself well to distribution of LNG as a liquid fuel, and Norton Rose Fulbright will be interested to see if that is part of any of the proposals that reach FID.

Conclusion

Asian markets are a very important part of the future of the LNG industry. The established markets are evolving and maturing, and gas will face pressure everywhere from renewables.

However, in Asia, renewable power projects are still in their infancy and not as easily implemented as they are in other parts of the world, meaning that for some of the key Asian economies the best option for reducing carbon emissions will be to first reduce and mitigate the emissions from the cleanest fossil fuel available, before transitioning further towards renewables and green gases.

The LNG industry is being seen to take the first steps in Asia to establish commercial models to offset and drive down emissions. These will be important as new markets for LNG open up as indigenous sources of natural gas are depleted.