Asia's Uncertain LNG Future: Conclusions and Implications for the United States and Asia
Mikkal E. Herberg
The essays, discussion, and analysis that emerged from NBR’s 2013 Energy Security Program provide a powerful vision of Asia’s future liquefied natural gas (LNG) markets and the range of major uncertainties emanating from both the rapid market changes and the geopolitical dimensions of LNG supply and demand. It is clear that demand will grow strongly and gas will become an increasingly important fuel for Asia in terms of energy security but also for environmental reasons. The potential for new LNG supply seems promising from the perspective of importers but is subject to major cost pressures and uncertainty over future pricing arrangements. The geography and geopolitics of Asian LNG are changing dramatically as new suppliers like the United States enter the market and as demand growth shifts from Japan and South Korea toward developing Asia, most importantly China. In addition, Japan’s continuing nuclear difficulties seem likely to add an enormous layer of uncertainty over the marketplace for many more years.
The program discussions converged on a number of core themes that will drive the development of Asia’s future LNG market and energy geopolitics. First, the region’s LNG growth is strongly rooted in the transition to cleaner energy that will transform the energy market in Asia. Natural gas is a favored fuel for expansion across Asia, and thus gas demand is expected to double by 2030. Imported LNG, much of it from outside the region, will meet a large part of that growth. As Nikos Tsafos points out, 90% of Asia’s LNG in 1988 came from inside the region, mainly Indonesia and Malaysia. By 2012, however, Asia sourced only 29% of its LNG from inside the region. So in energy security terms, Asia is rapidly becoming dependent on more distant supply sources and long and sometimes contested sea lanes for its LNG. Nevertheless, at the same time, its sources are becoming much more diversified. By 2017, Australia will surpass Qatar as the world’s largest LNG seller, and Japan, China, India, and other countries have already signed up for huge volumes. But this is likely to be high-cost LNG due to the big rise in Australia’s project costs. To meet demand, Asian buyers will be searching for other options. Although potential U.S. and Canadian LNG projects can help fill the gap, new Russian supplies will also be needed, and other supplies should be available from offshore East Africa after 2020. Nonetheless, across these various sources, LNG prices seem likely to remain high due to the cost of these projects. U.S. supplies may be somewhat less expensive in early years, but as the gas market in the United States strengthens, U.S. LNG prices over the longer term are unlikely to be substantially lower than other sources. Yet despite the fact that Asia’s LNG pricing problems are likely to remain, the region’s energy security will still benefit from the emergence of major “Western” supplies from the United States, Australia, and Canada, which can balance dependence on potentially less stable supplies from the Middle East and Africa.
Another core theme that emerged from the discussions reflected the persistent uncertainty about Asia’s LNG demand and price outlook, especially for the pivotal importers China and Japan. While Japan is the largest LNG importer in the world, China will be the biggest potential swing factor in Asia’s LNG demand outlook. China sees natural gas as a critical “bridge fuel” to help reduce its reliance on coal, which is highly polluting, and has very aggressive plans to more than triple gas use by 2020. The country has many supply options, such as rapidly increasing domestic production (including large shale gas resources); importing pipeline gas from Central Asia, Myanmar, and potentially Russia; and developing LNG along the booming eastern coastal region. Beijing already depends on imports for roughly 30% of its gas needs and is likely headed for 50% import dependence by 2020. Consequently, for energy-security reasons, Beijing is seeking to diversify its sources of gas and will pursue all the above supply options. LNG imports are thus likely to rise dramatically over the next decade. Chinese national oil companies are investing heavily in Asian, Canadian, and many other LNG projects around the world, along with signing large supply contracts for a wide range of projects. This strategy will draw China closer to Australia, Middle East suppliers, Canada, and potentially Russia. But geopolitically, Chinese buyers seem reluctant to rely on U.S. LNG supplies. They are apparently concerned about U.S. domestic opposition to Chinese energy investments as well as afraid that the United States might try to use LNG exports as diplomatic leverage.
Japan faces continuing challenges to rebuilding it nuclear energy industry, and LNG has been a key lifeline to generate electricity to replace lost nuclear capacity. LNG imports have jumped 25% since the Fukushima disaster, while prices have risen by 20% and produced the country’s first trade deficits in twenty years. The Japanese government is developing an entirely new energy plan and working with large LNG buyers and state energy companies to secure LNG supplies and find ways to lower costs. Tokyo sees potential U.S. LNG supplies as a huge opportunity to diversify its supply base and gain access to lower-cost, hub-based priced LNG. It is working hard in Washington to encourage LNG export permits for countries without free trade agreements (FTA) with the United States, while at the same time Japanese companies are investing in many U.S. projects. Because Japan is the world’s largest LNG importer, the pace and scale of the return of nuclear power to the country will have a huge impact on the Asian LNG market and prices. Enormous uncertainty persists about whether Japan’s LNG needs will remain high or decline toward historical levels with the potential return of nuclear capacity.
A third central theme of the program discussions focused on critical uncertainties in the LNG supply-side outlook for Asia—in particular, the enigmatic outlook for Russia and the complicated politics of obtaining LNG export permits from the United States. Northeast Asian countries are hoping that Russia, already a modest LNG supplier to Asia from the Sakhalin-2 project, will expand its LNG supplies to help further diversify the region’s import sources and provide more sources of nearby, secure LNG. However, both Gazprom and the Kremlin have been slow to move forward on new projects in the Russian Far East due to their fixation on defending Russia’s European market position and reticence to make the very large investments needed. Negotiations for a large gas pipeline to China, which would underpin Gazprom’s Eastern Gas Program, remain deadlocked. This has undermined the company’s incentives to invest in developing the vast gas resources in Far East Russia that would be part of an integrated plan. The consensus seems to be that one or two new Russian LNG projects will move forward in the next decade from among three possibilities: one planned by ExxonMobil and Rosneft based on Sakhalin-1 gas, an extremely expensive noncommercial project at Vladivostok sponsored by Gazprom and the Kremlin, and a low-cost third option that would involve expanding the Sakhalin-2 LNG project. Unfortunately, from Asia’s perspective, it remains problematic to rely very heavily on these supplies given the opacity and unpredictability of Kremlin energy politics.
On the other hand, discussion of the prospects for new U.S. LNG supplies going to Asia suggested that, despite the complicated domestic politics surrounding U.S. LNG exports, projects would be approved gradually and exports to Asia probably will commence sometime around 2015–16. A number of large gas-consuming companies and industries in the United States have coalesced to try to prevent or delay LNG exports in the hope of keeping U.S. gas prices as low as possible. There is also resistance among some environmental groups that claim that LNG exports would encourage more gas development via “fracking,” which they believe is environmentally damaging. The Obama administration, however, recognizes the important economic benefits from LNG exports; moreover, the United States has consistently argued to other producer countries that markets, not political or economic leverage, should determine the direction of energy trade. Consequently, the U.S. Energy Department and the Obama administration are being very deliberate and even painstakingly slow in approving new projects that could export LNG to non-FTA countries, such as Japan or members of the European Union. The discussion at the workshop suggested that more projects, beyond the four that have already been approved, would be permitted, likely leading to substantial growth in U.S. LNG exports to Asia after 2015.
Finally, a fourth theme that emerged from the program discussions centered on how the new shale gas and tight oil revolution in the United States may affect U.S. energy diplomacy and the country’s historically deep engagement in the Middle East and Persian Gulf. Some have argued that the trend toward energy self-sufficiency, combined with the war-weariness of the American public, cuts in the defense budget, and the “pivot” to Asia, may lead the United States to reduce its geopolitical footprint in the Middle East. This decision would have important implications for Asia, since much of its imported oil and LNG comes from the Middle East and is secured by U.S. power in the region and protection of sea lanes from the Middle East to Asia. However, the discussion suggested that the United States’ new independence from the need to placate energy exporters will give Washington greater freedom of movement and allow it to pursue a much more assertive and active role in global energy diplomacy. Moreover, new energy exports from the United States will allow it to strengthen partners such as Japan and the EU and potentially use its supplies to punish U.S. foes. For example, rising U.S. oil production has reduced oil imports, which has in turn reduced pressure on available global oil supplies and helped prevent the spike in oil prices that many expected from reduced Iranian oil exports. The United States has the opportunity to potentially use its large, and now excess, Strategic Petroleum Reserve to benefit allies in times of supply emergencies. However, the question remains whether Washington will be willing to use this new foreign policy latitude in an era of increased focus on domestic challenges and public opposition to overseas involvement, especially given how dramatically the Middle East has changed in the wake of the Arab Spring.
Overall, the 2013 Energy Security Program presented an outlook for Asian LNG that appears to be increasingly promising. Asia seeks to bolster its energy security through the expanding use of natural gas and LNG, while improving its energy mix to reduce the impact on the environment. It is vital for regional states, especially China, to reduce their coal use both to address air pollution and health issues and to lower the region’s carbon emissions, and LNG can be a bridge fuel in that effort. There are no doubt energy-security challenges looming in the LNG market, including the uncertain prospects for Russian LNG supplies, Japan’s continuing nuclear crisis, and questions about how the rise of U.S. LNG exports may affect regional alliances. But the current energy outlook for Asia promises a better supplied and much more diversified LNG market in the future, even though LNG is unlikely to ever be a low-cost fuel for the region.