Introduction: Asia's Uncertain LNG Future
Mikkal E. Herberg
Asia’s incredible economic growth has powered an enormous increase in energy demand over the past two decades. The region has now become “ground zero” for global energy demand growth. Demand for every fuel type and energy source has soared to meet skyrocketing consumption and to prevent energy from becoming a bottleneck to economic growth and job creation. As demand has risen, Asia’s dependence on imported supplies has increased as well. While this has led to new and deeper trade ties between Asia and its neighbors, such import dependence has also fostered regional anxieties—particularly among policymakers wary that it will increase regional vulnerabilities to global market shocks. For both policymakers and consumers across the region, energy security thus remains not only a critical strategic and economic concern but increasingly an issue defined by the search for reliable and affordable supplies.
In this search for greater energy security, Asia has rising hopes that natural gas can become a key component of its future energy mix. Indeed, there is enormous scope for the region to increase its gas use and benefit from lower emissions and energy-supply diversification. While natural gas use in Asia has been rising sharply in recent years, natural gas overall is still relatively underutilized. For example, outside Asia, natural gas makes up 30% of global energy use, whereas within the region gas makes up only 11.3% of total energy use. In part this is because of China’s very low gas share of only 5% of total energy in 2012. But even excluding China, the region’s gas share is still only 19%. 
As Asia seeks to expand its use of natural gas, demand for liquefied natural gas (LNG) will grow. Much of the gas it does use comes in the form of imported LNG, due to the long maritime distances in Asia that separate markets from supplies. In fact, the region has traditionally accounted for two-thirds of the global LNG market. Japan and South Korea alone have been the large base-load buyers of LNG, typically accounting for over half the global LNG market. And Asia’s overall LNG consumption is expected to grow dramatically over the next twenty years as China and India boost their LNG imports and as Japan and South Korea substitute LNG for declining use of nuclear energy. Even Southeast Asia, traditionally a significant exporter of natural gas to Northeast Asia, is seeing a dramatic shift in consumption and will also become increasingly dependent on imported LNG.
This relatively rosy picture for LNG demand is, however, highly uncertain. Perhaps most importantly, China’s potential LNG demand depends on many factors, including the scale of pipeline gas imports from Central Asia and Russia, the future of potential shale gas production inside China, domestic demand policies, and the pace of domestic gas price and industry reform. In terms of volume, China’s choices could have the single largest impact on the region’s future LNG demand levels. Japan’s future LNG demand depends heavily on the very uncertain pace and scale of the return of nuclear power generation in the wake of the Fukushima nuclear disaster. South Korea also faces resistance to expanded nuclear use and uncertainty over possible pipeline gas supplies from the Russian Far East that weigh heavily on future projections of LNG demand. The pace of growth in LNG use in Southeast Asia and India is likewise subject to wide variability.
On the supply side, there is also significant uncertainty about the extent to which Asia can rely on LNG to meet its future gas needs. Major new supplies are expected over the next decade from Australia, Russia, the United States (including potentially Alaska), Canada, and offshore East Africa, and there are further possible new supplies from the Persian Gulf. Australia’s new projects put the country on track to become the largest LNG exporter in the world by 2020, but further expansion is threatened by rising cost pressures. Potential U.S. and Canadian LNG exports to Asia have been stalled by domestic politics, objections from indigenous populations, and environmental constraints. Potential LNG supplies from the Russian Far East remain subject to opaque Kremlin energy politics and competition between Russia’s two major state energy firms—Gazprom and Rosneft. Finally, Persian Gulf supplies are, as always, threatened by chronic geopolitical uncertainty.
Moreover, the future of Asia’s LNG consumption and supply growth will depend heavily on the evolution of LNG prices. The region’s current LNG prices, because they are linked to sky-high oil prices, are nearly four times U.S. natural gas prices and almost double average European natural gas prices. Asian LNG consumers, especially in Japan and South Korea, are thus looking for more competitive prices. A key benefit of potential new LNG imports from the United States would be the introduction of competitive hub-based gas pricing that eventually could help reduce Asia’s high LNG prices.
Hence, growth in LNG could bring enormous benefits to Asia in terms of energy security and supply diversification, as well as a cleaner energy mix. Nevertheless, as the preceding discussion illustrates, there are major uncertainties in the outlook for LNG markets and pricing, as well as in the domestic politics and geopolitics of LNG.
To address these issues, the National Bureau of Asian Research (NBR) organized its ninth annual Energy Security Workshop in Washington, D.C., on June 21, 2013. Building on NBR’s ongoing initiative to bring together policymakers, industry leaders, and key stakeholders concerned with Asia’s energy future, the annual workshop convenes senior specialists for high-level discussions on the future of Asian energy markets. The arguments presented at this event are then used to inform discussion throughout the year, as well as in this final report. This year’s program—“Asia’s Uncertain LNG Future”—focuses on the implications of growing LNG consumption and production for regional energy security in the Asia-Pacific. As in past years, we are grateful for the generous support of our sponsors—the Asian Development Bank, Chevron, ConocoPhillips, and ExxonMobil—whose contributions enable us to examine the central energy-security challenges facing the United States and the Asia-Pacific today.
To explore these themes in depth, NBR commissioned four essays to generate program discussions, which then built on the insights from the workshop. Each essay addresses a key issue in the emerging Asian LNG landscape: (1) the changing nature of Asia’s LNG market supply and demand, (2) the geopolitics of growing LNG use in the region’s major gas importers, (3) the production and geopolitical outlook for its big LNG suppliers, and (4) the implications for Asia’s energy security of the growing energy abundance in the United States. This NBR Special Report includes these four essays along with a concluding essay drawing together some of the key conclusions from the overarching program.
In the opening essay, Nikos Tsafos of PFC Energy/IHS provides a superb overview of Asia’s overall natural gas and LNG markets to establish a strong foundation for the report. Tsafos identifies several key trends. First, Asia’s gas market is highly diverse, comprising large net importers like Japan and South Korea, countries in the middle like China that produce most of their gas but are also growing importers, and the traditional net exporters of LNG such as Indonesia and Malaysia. Second, while Asia increasingly relies on supplies from outside the region, including from the Middle East, over time it is benefiting from an increasingly diversified set of LNG suppliers that is strengthening the region’s LNG supply security. Third, high LNG prices represent a growing financial drain on importers, with Japan being especially hard hit by rising prices and import volumes. Partly because of this trend, Asia’s LNG importers are actively supporting their national oil companies to go out and invest in the next large tranche of LNG projects as a way to strengthen supply security and, hopefully, reduce prices. Fourth, Tsafos believes that LNG supplies should be ample over the next decade, meaning that LNG will accelerate the move away from coal and biomass and thus offer significant environmental benefits. Importantly, China is likely to be the place where LNG and pipeline gas converge on the continent, potentially giving Beijing an important pricing role for gas. Finally, Tsafos argues that more “Western” gas from the United States, Canada, and Australia will be beneficial in terms of diversification, while the potential for Russian supplies remains very unclear due to uncertainty about Kremlin energy politics.
Next, Damien Ma from the new Paulson Institute provides an excellent overview of the LNG outlook for China, which could become the largest swing importer of LNG over the next two decades. Ma suggests that Beijing has very aggressive plans to increase natural gas use for both environmental and energy-security reasons. China will be able to access large gas supplies by pipeline from Central Asia, Myanmar, and possibly Far East Russia, and domestic gas production is expected to rise significantly. Yet given the demand outlook and the scale of the government’s goals, China will likely also require large imports of LNG. With this in mind, Beijing is encouraging state energy companies to invest in LNG projects overseas, as well as seeking a very diversified set of suppliers to reduce risk. Ma argues, however, that there are strong political concerns in Beijing about relying on U.S. LNG supplies and that Chinese companies have chosen to be more active in Canada and Australia as a result.
In the third essay, which addresses LNG supply issues, Michael Bradshaw of the University of Leicester in the United Kingdom provides an excellent overview of the outlook for potential Russian Far East LNG supplies to Asia. Russia is already a significant LNG supplier through the Sakhalin-2 project by Shell-Gazprom, but gas resources in the Russian Far East could support huge new pipeline and LNG supplies to Asia. The challenge is to sort out the conflicting agendas among the Kremlin, Gazprom, Rosneft, and other key players over the priorities for various projects. Gazprom has developed the Eastern Gas Program for Asia, but a linchpin for that plan is the construction of a large gas pipeline to China that has been under negotiation for over a decade, with no firm deal in sight. As a result, Gazprom and Rosneft are increasingly competing to control the Sakhalin and other Far East gas resources that would supply various possible LNG projects. Expansion of the Sakhalin-2 project, the most commercially viable plan, has been blocked by Gazprom’s preference for a new and wildly expensive LNG plant in Vladivostok that is backed by President Vladimir Putin for political reasons, including promoting regional development. A Rosneft-ExxonMobil plan for a new LNG plant based on ExxonMobil’s Sakhalin-1 project is likewise uncertain because of resistance from Gazprom, which wants to control that gas supply for use at Vladivostok. Hence, it remains unclear which of these projects will move forward, and as a result, Asia is not very confident about the scale of future Russian LNG supplies.
In the final essay, Amy Myers Jaffe from the Energy and Sustainability Initiative at the University of California–Davis analyzes the geopolitical implications of the increasing oil and natural gas production in the United States and the country’s growing self-sufficiency. Some have suggested that declining dependence on energy imports could lead the United States to become more isolationist and gradually turn away from its historical role in shaping the Middle East and global energy geopolitics. Jaffe argues, on the contrary, that energy self-sufficiency will allow the United States to pursue a more active agenda for global energy security. Declining dependence will open the possibility for creative leadership by the United States on energy matters, ranging from using its large emergency oil stocks to assist allies to being better able to pursue human rights and democratization. Washington will no longer need to plead with allies or oil exporters to cooperate on global supply issues or the use of energy sanctions as a diplomatic tool. Jaffe thus argues for a new national dialogue on foreign policy that recognizes the United States’ growing energy and economic strengths and ability to shape events abroad.
Overall, the four essays in this report paint a picture of Asia as a region where LNG will be an increasingly vital component of energy security while also strengthening the environmental outlook. Although there are significant uncertainties about the evolution of LNG demand, supply, and pricing in Asia, the outlook is relatively positive. The biggest uncertainties will revolve around six key questions: the outlook for Japan’s LNG demand as it grapples with its nuclear demons; China’s gas choices, which will drive its LNG needs; key supply uncertainties surrounding the rising cost of Australia’s LNG projects; U.S. and Canadian policies on LNG exports; Russia’s energy politics surrounding its large Far East gas supplies; and crucially, the evolution of LNG pricing in Asia.
 All figures in this paragraph are from BP plc, “BP Statistical Review of World Energy,” June 2013.