Wood Mackenzie: Asian Energy Policies Changing Profile of LNG Procurement

At Gastech 2014, Wood Mackenzie highlighted that evolving Asian governments’ energy policies are limiting the development of some new LNG supply options and changing the risk profile of LNG procurement.

Gavin Thompson, Head of Asia Pacific Gas & Power Research for Wood Mackenzie says, “The established buyers- Japan, Korea and Taiwan are seeing government indecision in areas such as the use of nuclear power in its energy policy increase LNG demand uncertainty. In addition, evolving gas and power market liberalization policies present new competition for existing buyers, who would have historically underpinned new LNG trains, but are now less confident of their future demand outlooks. Consequently, both traditional and new buyers are asking for smaller incremental volumes along with greater contractual and pricing flexibility. This is making financing of some proposed LNG projects more difficult.”

Over 500 million tonnes per annum (mmtpa) of new LNG supply capacity is currently proposed for supply to come online from now till the end of the decade, mostly from the US, Russia, Canada, East Africa and Australia, in addition to smaller niche projects like FLNG. Wood Mackenzie says even if overall Asian LNG demand growth remains strong, many new supply projects may not take final investment decision because of the uncertainties on the buyer-side: “Greenfield LNG is never easy. But while numerous factors hinder new project development, domestic policies that influence buyer behavior are critical, and perhaps less considered. Governments and buyers need to be acutely aware of the implications of energy policy, or sometimes a lack of energy policy, on the pace of some new LNG project development,” adds Thompson.

Wood Mackenzie’s presentation suggests that in the current climate, options for new supply by 2020 appear increasingly limited to the US and Russia. Driven by a renewed focus on cost competitiveness, Asian government policy is indirectly favoring exports of US LNG given prevailing low US gas prices. However, US LNG comes with new risks that buyers will need to manage, including Henry Hub price exposure, and political risk.

Also making progress is Russian LNG. Thompson expands, “Arguably, Russia has taken a view that the growth in US exports could frustrate its own future LNG ambitions and therefore it must promote supply into Asia at an accelerated pace to beat the US to market. But Russian LNG also comes with risks that will need to be managed – technical risk and political.”

In conclusion, Thompson says, “Government behaviors are now a key driver of the changing Asian LNG buyer risk appetite. These include Henry Hub price risk, new political risks in the US and Russia and new technical risks such as floating LNG. With Asian government policies discouraging a broader range of new supply options, managing these risks will become a new reality for buyers in the Pacific basin.”