Outlook on Asian LNG: Market Dynamics and Pricing, IEEJ Roundtable for SIEW 2016, 27th October, Singapore
Natural Gas (LNG) Pricing Transition and Hubs in East Asia
Xunpeng Shi, PhD Deputy Head of Energy Economics Division, ESI NUS President, Chinese Economics Society Australia (CESA)
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Asia’s gas pricing transition GoG vs. Oil-Linked Markets Asia – oil-linked LNG market Europe – a hybrid market
Since the late 1980s
North America – a spot market Source: Poten & Partners
% of Spot Trade in Total Imports 45%
Share of spot trade is growing
World
40%
Asia Pacific
35%
In Asia Pacific, growth is slower World average: ~31% Asia Pacific average: ~12%
30% 25% 20% 15% 10% 5%
0% 2005
2007
2009
2011 Source:
2013 IGU 2014
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Lessons from European hub development Market liberalization is necessary in creating the competitive markets Pricing transition for long-term contracts sustains competition and generates liquidity Political will and regulations safeguard competition environment Natural factors, such as domestic production and culture matter Traditional utilities: loss of market shares; financial loss; failure to meet the minimum take-or-pay levels Renegotiation and breakdown of long-term oil indexed contracts (through arbitration) Source: Shi, X., forthcoming. Development of Europe’s gas hubs: implications for East Asia. Natural Gas Industry B.
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East Asia’s Quest for Gas/LNG Trading Hubs
Gas Hub
LNG Hub
•Domestic market liberalization •Unbundling, wholesale competition •10 years+
Shanghai Hub Prices
Tokyo Hub Prices
•LNG contract flexibility •Destination flexibility, Take-or-Pay •Spot trading
Regional Competitive market Destination flexibility
Issues Inter-hub competition (IEA, 2013) Hub indexation Destination flexibility Take or pay
SLInG Prices
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No significant difference between Shanghai hub benchmark and Tokyo hub benchmark prices • Spot price: Shanghai hub (S1) vs Tokyo hub (S2) 0.5
USD/mmbtu
0.4 0.3
Henry Hub
0.2
United Kingdom
0.1
Japan
0
China
-0.1 -0.2
2015
2020
2025
2030
2035
Source: Shi, X. and Variam, H.M.P., 2016. Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia. Energy Policy 96, 587-596.
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Hub indexation and destination flexibility is of EA’s interest Gas procurement costs (2015-35), % change from baseline 0.00%
World
China
Japan
Korea
Chinese Taipei
-5.00% -10.00% -15.00% -20.00% -25.00%
After removal of destination restriction, change to hub indexation does little more benefits to EA importers, except China S1:Shanghai Hub
S3a: Hub - No DS
S4a: Oil - No DS
*World cost calculated from the output of the optimizer Source: Shi, X. and Variam, H.M.P., 2016. Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia. Energy Policy 96, 587-596.
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Pricing transition has different impact among different LNG exporters LNG Exports to Japan, Korea and Chinese Taipei, in bcm
Hub No-DS vs Base
Hub Price vs Base 8
50
6
40
4
30
2
20
0 2015
2020
2025
2030
2035
10
-2
-6
-10
-8
-20 Asia Pac Exp
Russia
Middle East
North America
Latin America
Africa
Total
-30
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
0
-4
Asia Pac Exp
Russia
Middle East
North America
Latin America
Africa
Total
Source: Shi, X. and Variam, H.M.P., 2016. Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia. Energy Policy 96, 587-596.
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Pricing transition creates winners and losers Example: China’s hub indexation on Australia’ LNG exports
• Export revenue for Australia LNG in different scenarios, 2015–35
Exports (bcm) Baseline Spot
Contracted exports Uncontracted exports Total exports Profit
1,251.6
Revenue ($ billion) Spot, no Baseline Spot Spot, no TOP TOP 1,250.3 1,072.3 697.0 670.9 601.1
321.2
322.6
368.7
122.3
115.4
140.9
1,572.8
1,572.9 (0%)
1,441.0 (-8.3%)
819.3
786.3 (-4.1%) 299.4 (-11.3%)
742.0 (-9.4%) 300.0 (-11.1%)
333.7
Source: Shi, X., Variam, H.M.P., 2015. China's Gas Market Liberalisation--The impact on China–Australia gas trade, in: Song, L., Garnaut, R., Cai, F., Johnston, L. (Eds.), China's Domestic Transformation in a Global Context. ANU Press, Canberra, pp. 137-174.
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Relaxing of Take-or-Pay clauses create further market flexibility China’s LNG import does not response to lower demand scenario Without TOP
With TOP LNG Flows to China - Base vs Low Demand
LNG Flows to China - Base vs Scenario 2
3
0
2
Southeast Asia to China
Middle East
-10
bcm
0
bcm
Sub Saharan Africa to China
Middle East to China Australia to China
-5
1
North America to China
Southeast Asia
-15
-1 North America to China
Australia
-20
Middle East to China
-2
Southeast Asia to China
-25
Australia to China
-3
North Africa to China
-30
-4
2015
2020
2025
2030
2035
2015
2020
2025
2030
2035
Source: Shi, X. , Variam, H.M.P., & Tao, Y, forthcoming. review for publication. Global impact of uncertainties in China’s gas market. Submitted to journal.
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15
10
1977M01 1978M01 1979M01 1980M01 1981M01 1982M01 1983M01 1984M01 1985M01 1986M01 1987M01 1988M01 1989M01 1990M01 1991M01 1992M01 1993M01 1994M01 1995M01 1996M01 1997M01 1998M01 1999M01 2000M01 2001M01 2002M01 2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01 2012M01 2013M01 2014M01 2015M01 2016M01
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Low oil price period is a window to facilitate the pricing transition 25 Europe NG
Crude oil, average
HH Spot
LNG, Japan cif
5
0
Source: World Bank.
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Thank you! Energy Studies Institute 29 Heng Mui Keng Terrace Block A, #10-01 Singapore 119620
For enquiries: Dr. Xunpeng Shi Tel: (65) 6516 5360 Email:
[email protected];
[email protected]
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Brief self introduction Senior Fellow, Deputy Head of Energy Economics Division, ESI, National University of Singapore http://esi.nus.edu.sg/
THE 29th CESA ANNUAL CONFERENCE University of Western Australia July 2017, Perth, Australia
THE 40th IAEE INTERNATIONAL CONFERENCE • • •
Meeting the Energy Demands of Emerging Economies Implications for Energy and Environmental Markets 18-21 JUNE 2017 | SINGAPORE
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Skyline of Marina Bay, Singapore. Photo courtesy of the Singapore Tourism Board.
President, Chinese Economics Society Australia (CESA) , http://www.ces-aus.org/
