Can the global gas market rely on pent-up Asian demand?
November 2015 | Rembrandt Sutorius
Gas market forecasters agree that Asia will continue to be the main driver for global gas demand until 2030. China, India, Pakistan and the ASEAN nations look set to account for more than 90% of total new volume demand over the next 15 years. With a decline in the capacity of older LNG terminals, around 240 bcm of new supply capacity will be required by 2030.
Despite concerns of a future shortage, supplier enthusiasm will be dampened short-term by a less than stable 2015, which has seen a sudden slowdown of the Chinese economy alongside a reticence to fuel switch as a result of lower oil prices. With nuclear facilities due to come back online in Japan and Korea following a brief pause post-Fukushima, there will be a further loosening of demand.
Asian gas demand to hold steady despite a shaky 2015
In reality, these short-term variants are likely to have only a small impact on long-term demand growth in the region, which is set to remain strong at around 5%.
The Asian gas market is more closely linked to oil than any other. Oil-based price indexing is still the most common pricing method, while North America and Europe have shifted towards a hub-based model.
While oil prices are low, gas prices are low, and right now, they’re around $4 mmbtu less than the Asian market is used to.
But imports from gas-rich nations into Asia are dependent on higher gas pricing – the building of new facilities to satisfy demand depends on their ability to turn a profit; while exporting needs to be financially compelling - while the cost of moving gas outweighs the potential return there’s a chance that countries with the required resources will be more reticent to share them around.
Amidst such uncertainty, securing imports will be critical to ensuring continued supply.
The Asian gas market – regional drill-down
China will continue to generate the most regional demand and will come under increasing pressure to develop its own reserves as well as secure cross-border pipeline framework agreements with its neighbors.
The country has already taken its first steps in this direction having signed an agreement with Russia in late 2014 to provide pipelined supply from its Eastern provinces, however this single agreement, in combination with low domestic production levels (which were recently further hampered by a government announcement to cut back on shale subsidies), won’t be enough to satisfy China’s gas-hungry transportation, residential and industrial sectors.
Though the economic slowdown will provide a short-term reprieve, it’s unlikely to be enough for China to get its gas-powered house in order.
The ASEAN countries too, will become increasingly dependent on imports after 2015, with all countries experiencing strong demand growth.
Of the individual nations, only Malaysia, Myanmar and Brunei are expected to remain net exporters, while Thailand and Indonesia will be most in need of new LNG import volumes.
In India, demand is expected to increase by 5.9% p.a. to 127 bcm in 2030. However India, unlike the rest of Asia, will have to rely exclusively on LNG imports to satisfy demand as piped supplies look unlikely to materialize as a result of security concerns and complicated cross-border relationships.
In contrast with their regional neighbors, demand growth in Japan and South Korea looks set to remain relatively modest over the coming years. Relatively strong growth in Japan’s industrial sector will be offset by a switch back to nuclear, while already saturated markets will stifle growth potential in Korea, despite increasing Government support for a shift away from coal.
About the authors
Rembrandt Sutorius is General Manager - Gas & LNG at Energy Insights in McKinsey's Amsterdam office.