Impact of New Waves of LNG in the Asia Pacific Gas Market: Future of LNG Market in Asia

Jinseok Sung Gubkin Russian State University of Oil and Gas Department of International Oil and Gas Business

33rd USAEE/IAEENorth American ConferenceThe Dynamic Energy Landscape25 October 2105Windham Grant Ho-telPittsburgh, USASession 10 Liquefied Natural Gas (LNG)

Contents

Impact of new LNG from Australia, USA and Russia on the Asia Pacific LNG market (1) Change of demand and supply balance in the

Asian LNG market before and after the oil price fall (2) LNG price movement (3) LNG pricing competition LNG Oil indexation vs Henry Hub linkage• Conclusion

2010-2014Sellers’ marketPeriod of increasing demand and high LNG price

2010-2014LNG De-mand/Price

2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

0

2

4

6

8

10

12

14

16

18

Japan KoreaChina TotalLNG Price(Annual average in Japan/Right axis)

MT/y

ear

$/m

mbt

u

30% increase in LNG demand in 3 years

Average LNG price rocketed by over 50% in 3 years

2012-2013Outage of nuclearReactors inSouth Korea

Demand30% up

LNG price rocketed By over 50%

Source : Customs data (Japan, South Korea), LNG Industry (GIIGNL), Modified by author

It looked as if LNG demand in Asia will keep on increasing and price will stay high all the time

2011Fukushimadisaster

Oil Natural Gas

Nuclear Coal Others05

101520253035404550

Share of electricity gener-ation by fuel Japan

Before Fukushima accident (2010)After Fukushima accident (2013)

(%)

2015Beginning of LNG oversupplyDecreasing demand and low oil/LNG price

2015End of sell-ers’ marketBeginning of LNG mar-ket over-supply

LNG import volume in 2015 in comparison with 2014 (%)

Sharp fall of LNG price in 2015

LNG import iin 2015

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Japan Korea China

LNG price 2014 vs 2015 (%)

LNG price 2014 ($/mmbtu)

LNG price 2015 In August ($/mmbtu)

Spot LNG Japan September($/mmbtu)

-60 -50 -40 -30 -20 -10 0 10 20

Korea Japan

Source : Customs Data (Japan/Korea), Ministry of Economy, Trade and Industry Japan, Modified by author

Together with oil price, LNG import also fell in major importing countries

Decreasing demand + incremental sup-ply + low oil price=Shocking fall of global LNG price

Natural gas contract situation and de-mand out-look before oil price plummeted

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

0

50

100

150

200

250

Total import(factual&outlook by China's National Bureau of Statis-tics, CNPC)Golden rules case (IEA Golden rules for golden age of gas)Low unconventional case (IEA Golden rules for golden age of gas)LNG contracted volume+Pipeline capacity

Volu

me(

mta

p)

China was already over-contracted even before slow-down of demand

Source : CNPC, IEA, GIIGNL, K.Kushkina (Neftegazovaya Vertical,July/2014), media source, author

Improvement of domesticGas productionPipeline import from Central AsiaCompetition with other fuels in theDomestic market, coal, LPG etc.

New LNG projects adding large amount of extra vol-umes into the market

When demand began to falterin the LNG market New LNG from 2015 Global trade volume LNG 2014

0

50

100

150

200

250

300

New LNG volume under construction over 60% of global LNG trade volume in

2014

Australia USA Russia

MT/y

ear

Over60%!!!

2014 2015-2019+projects in planning Stage in USA, Canada, Mozambique, Russia etc

Source : World LNG Report (IGU)Delay/Cancellation of projects in Canada, Australia and Russia

LNG pricing system in the Asia Pacific market

Traditional oil indexation LNG pricing vs linkage to Henry Hub

2011-2014High crude oil /low Henry Hub price period

2010 2011 2012 2013 20140

2

4

6

8

10

12

14

16

18

20

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Malaysia

Katar

Russia

Australia

Brunei

Indonesia

Oman

Henry Hub price

HH LNG at Japanese port

JCC(Right axis)

$/m

mbt

u

$/ba

rrel

Possible price differenandtialBetween US LNG other competitorsIn Japanese market

Source : Trade statistics of Ministry of finance, Japan (Modified by author)

If oil price stayed over $100, US LNG could have absolutely price-competitive

Before crude oil price shock/LNG pricing Competition

JCC linkagevs HH linkage

After/intense price-competitions be-tween all projects

Shocking oil price fall made price-differ-ential between each project more narrow, intensifying competitions

• Oil indexed LNG >>> HH linked LNG

JCC less than $60/barrel

• Oil indexed LNG > HH linked LNG

JCC $60/barrel-$70/barrel

• Oil indexed LNG = HH linked LNG

JCC $70/barrel-$80/barrel

• HH linked LNG > Oil indexed LNG

JCC $80/barrel-$90/barrel

• HH linked LNG >>> Oil indexed LNG

JCC over $90/barrel

* In case of Henry Hub $3/mmbtu-$5/mmbtuLittle price differential between oil indexed LNG and HH indexed LNGwhen oil price approx. $$70-$80/barrel and HH $3/mmbtu-$5/mmbtu

Conclusion

Low oil price will affect not only US LNG exporters but also existing LNG exporters using oil indexation, mak-ing LNG export less profitable.

Oil price decrease made price differential between JCC LNG and HH LNG very narrow and LNG linked to one pricing system is not much more price-competi-tiveness than another.

Low oil price and faltering demand in major markets made competitions among sellers to unprecedented level.

If Henry Hub price stays under $3/mmbtu level like in 2015, it is expected that US LNG can maintain price-competitiveness even in low oil price market envi-ronment.

Oversupply in the Asian LNG market is expected to continue into the upcoming years.

Thank you for your atten-tion!

USAEE/IAEE North American conferenceThe Dynamic Energy Landscape

Pittsburgh, Windham Grand Hotel, USA25 Oct-28 Oct 2015

Jinseok SungGubkin Russian State University of Oil and Gas

Department of Oil and Gas BusinessFaculty of International Energy Business

65, Leninsky prospect, Moscow, RussiaJinsok.sung@gmail.com