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Asia laps up cheap LNG as '2023 problem' looms

Market watchers expect a price rebound around that year

An LNG tanker moored east of Tokyo: Japan is the world's No. 1 importer of the fuel.   © Reuters

TOKYO -- As prices of liquefied natural gas fall, imports of the fuel are rising. And no region is thirstier than Asia, which accounts for 70% of global LNG demand. Yet even as the region reaps the benefits of the trend -- supply stability, for one -- there is concern that the supply-demand balance might tighten once again.

Some refer to this fear as the "2023 problem."

In July, the Japan International Cooporation Agency, the World Bank and other parties agreed to finance the construction of an LNG import terminal in Bangladesh. Though the South Asian country is a gas producer, economic growth is projected to send its energy demand soaring. It plans to start importing the fuel, potentially in 2018, to meet its needs.

Fourteen Asian countries, including Malaysia and Singapore, began importing LNG in 2013 or thereafter, according to Japan's Ministry of Economy, Trade and Industry. Roughly 10 more plan to do so by 2020, including Vietnam.

LNG is primarily used for electricity generation and city gas supplies. The International Energy Agency expects global LNG demand to rise by about 50% to 460 billion cu. meters in 2022, compared with 2012.

Buyer's market

For now, the combination of growing energy needs and low LNG prices makes imports a no-brainer. Japan in early 2014 was paying $18 to $19 per unit of LNG, measured in millions of British thermal units. Today it pays only $5 to $6.

The price drop stems partly from oversupply -- not only from traditional sources like Russia and Qatar but also places like the U.S., where shale gas production is picking up, and Australia, where large gas fields have been developed.

Global LNG export capacity is projected to reach 650 billion cu. meters in 2022.

Japan, in particular, has much to gain from low LNG prices. Following the meltdowns at the Fukushima Daiichi nuclear power plant in 2011, all of the country's reactors were idled, forcing it to rely on thermal generation. The nation found itself paying a "Japan premium" on imported LNG. Not anymore.

Japan is the world's No. 1 importer of LNG, accounting for about a third and procuring more than double South Korea's imports, according to BP.

China and India, meanwhile, rely on coal for 70% of their electricity needs. But as the price difference with LNG has narrowed, both have increased their gas imports significantly. Natural gas produces about 40% less carbon dioxide than coal -- and fewer pollutants -- making it an appealing choice for countries looking to lighten their environmental footprints. 

The buyer's market is creating an opening to rethink certain trade practices.

"[LNG] stocks are piling up, and we hope to review the terms of our contract when we renew it," a Japanese power company official said after seeing a report published in June by the Japan Fair Trade Commission. The commission called on the industry to reconsider the destination clause often included in LNG contracts, especially those with state-owned oil producers in Asia and the Middle East.

The clause allows deliveries only to a predetermined destination -- preventing sales to third parties. The commission said the clause may violate antitrust regulations.

Yoshikazu Kobayashi, senior economist at the Institute of Energy Economics, Japan, welcomed the commission's request. "Companies will be able to renegotiate their contracts [with exporters] based on the commission's view, which increases their management flexibility," he said.

Eager to build

Another benefit for Japan: More Asian LNG imports will mean more opportunities to export related infrastructure, such as terminals, storage facilities and pipelines, according to Kobayashi.

"Demand for infrastructure is strong in Asia," said Kenichi Aso, chief of the Japan Bank for International Cooperation's oil and gas finance department. This serves the ends of Japanese Prime Minister Shinzo Abe, who has positioned infrastructure exports as a major pillar of his growth strategy.

Yet, even though forecasters expect the oversupply to persist for a while, that 2023 problem looms large.

The low prices are already sapping developers' appetite for investment. The amount of investment decided last year fell by two-thirds, compared with 2014.

In July, Qatar said it will increase its supply capacity to 100 million tons, from 77 million tons, over the next five to seven years. But industry watchers are skeptical. Across the sector, capacity growth has been slowing even though demand has been growing steadily. Most expect demand to overtake supply once again as early as 2023 -- triggering a price rebound.

Japan's trade ministry wants to make the most of the current market conditions, in part by setting up an LNG trading hub with high liquidity by the early 2020s. As with any market, though, big price swings come with big risks. 

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