Indonesia Imports Will Push Asian LNG Prices Up
Posted on Jun 13th, 2011
Malaysia, Indonesia Imports Will Push Asian LNG Prices Up
Already strong Asian liquefied natural gas prices will get a further fillip as Indonesia and Malaysia, the world’s second- and third-biggest exporters, turn to imports to feed local demand.
Indonesia is building LNG import terminals with capacity of nearly 10 million tonnes, while Malaysia expects to receive its first shipment in 2013. This about-turn is happening just as Japan cranks up gas-fired power plants to make up for lost nuclear generation.
High prices would add to the impact of rising energy costs on inflation in China and India, which are looking to massively boost their LNG use over the next decade.
Asia pays a premium versus buyers in the U.S. or Europe because buyers have very little option but to lock in long-term contracts to ensure steady supplies of the fuel, and under these LNG prices are linked to oil.
“If I’m a gas buyer and today my term renewal is coming up and I go long-term and index to crude I get into a take or pay situation,” Charif Souki, chief executive of Cheniere Energy, told Reuters.
Under a take or pay provision typical in long-term contracts, LNG buyers must lift a minimum volume each year or pay for the shortfall.
“But if I do nothing and there is a very cold winter, I will be blamed for not ensuring sufficient supply,” Souki added.
Spot LNG prices in Asia rose to around $13.50 per million British thermal units (mmBtu) by the end of May, up from around $6.50 in July last year, Reuters data showed LNG-AS.
Prices could rise further if Japan keeps shutting nuclear reactors.
BECOMING IMPORTERS
Indonesia and Malaysia were the number two and number three LNG exporters last year, the International Gas Union said in its World LNG Report 2010 released on Tuesday. Indonesia was the world’s largest from 1984-2005 before being overtaken by Qatar.
But the two, facing dwindling output from ageing fields and rising demand from power plants, are looking at imports to meet demand in some areas.
“Both countries are facing the issue of domestic demand outstripping supply because of subsidised fuel prices,” said Tilak Doshi, principal economist with the Energy Studies Institute in Singapore.
To feed rising demand, Indonesia’s state energy firm Pertamina and state power firm PLN are building eight small receiving terminals in eastern Indonesia, with a total capacity of 1.4 million tonnes a year (tpy).
The country is also building a 3 million tpy terminal on Java island, and a 1.5 to 2 million tpy facility in northern Sumatra. Another 3 million tpy receiving plant is also being built in Java, where half the supplies would be from a field in another island, Borneo.
Indonesia currently has three export terminals — Bontang, Tangguh and Arun, feeding customers from Japan to South Korea. The capacity of Bontang, located in Borneo island, is 21.64 million tpy, Tangguh in Papua has a capacity of 7.6 million tpy, while Arun in Aceh province is 6.5 million tpy.
Pertamina has applied for permission to convert the Arun terminal as fields serving the plant dry up. Shipments of LNG from the plant are expected to drop from 36 cargoes in 2010 to 31 this year, and to stop by 2014.
One cargo can range from 80,000-120,000 tonnes.
“As existing assets decline, we will need to develop new sources of supply to meet growing domestic demand,” said Pertamina CEO Karen Agustiawan at a conference in Singapore in March.
Indonesia has been failing to meet its long-term supply commitments from about 2004-05 because output has been steadily sliding.
The country’s annual production fell from 419 cargoes in 2005 to 358 cargoes in 2008 based on the output from its two LNG plants at Bontang and Arun. It rebounded to 427 cargoes by 2010 due to the start-up of a third LNG plant at Tangguh in 2009.
This is expected to fall again to 362 cargoes this year, oil and gas regulator BPMigas said in January.
Reduced output has resulted in Indonesia missing its supply commitments to big buyers like Japan. In 2006, there was a shortfall of 36 cargoes from the country’s two plants, while the Bontang field’s deficit in 2008 was 41 cargoes below contracted volumes. No figures were available for recent years.
Indonesia has in the past bought cargoes in the spot market or asked buyers to delay delivery.
BUILDING TERMINALS
Neighbour Malaysia is building a 3.8 million tpy terminal in Malacca, scheduled to be ready by June 2012, and is conducting a feasibility study for another in Johor. The capacity of the Johor facility is yet to be announced.
National oil company Petronas operates one of the world’s largest liquefied natural gas complexes in Sarawak with eight production trains that have an annual capacity of 24 million tonnes.
Top LNG exporter Qatar is boosting shipments to Asia, while fourth-largest exporter Australia has over $200 billion of LNG projects on the drawing board and aims to triple production to 60 million tonnes a year by 2020 to help meet Asian demand.
But falling supply from two of the world’s top suppliers means LNG prices may rise in 2014-2015 because new supply from Australia and the U.S. will not be ready to fill in the gap, Cheniere Energy’s Souki said.
“The era of cheap, local and abundant gas reserves is over,” said Graham Tyler, Wood Mackenzie’s head of Asia-Pacific gas and power. |
