This “more-not-less” scenario is extremely good news for producers of LNG from conventional and unconventional sources of gas around the Australian coast.
It means east coast coal-seam gas producers will start exporting at precisely the right time, catching Asian demand ahead of any competition from potential US exports.
It also means a second wave of LNG developments on the west coast based on floating production and liquefaction technology will be able to enter a market driven by a combination of demand pull and supply constraint.
For everyone in the LNG business the changing energy equation in China, Korea and Japan is unequivocally good news washing away concern about sluggish demand meeting excess supply with a resulting negative effect on prices.
Among the first to note the changes underway in the Asian market is investment bank, JP Morgan, which recently updated its analysis of global LNG supply and demand. That process probably needed a crystal ball as much as hard facts but one was one that produced a very interesting outcome.
According to JP Morgan the LNG business worldwide has been operating with spare capacity that varies from 15% a few years ago to around 12% today. From next year, though, that spare capacity dries up as Asian consumers soak up the surplus with a shortfall evident in supply over the next five-to-six years.
One reaction to a forecast such as that is to point out that producers will squeeze every last molecule of gas from their existing systems to maximise profits. That means the shortfall might disappear as quickly as JP Morgan spotted it.
Another reaction could come from US gas producers who will rush to get their glut of gas into the Asian market as quickly as possible to cash in on prices three-to-four times what is available at home.
However, before we even get to the point of guessing who is going to produce how much LNG, and when, it is worth taking a step back and looking at why a shortage might be emerging in the first place.
The answer seems to lie in a combination of factors, mainly environmental. China, Korea and Japan, are growing increasingly wary of coal because of its carbon emissions pollution, and nuclear power because of its bad habit of causing the odd disaster such as the Fukushima accident.
Layered on top of a growing anti-coal and anti-nuclear mood is the slow dawning of what gas has done for the US. Not only is the economy growing faster than expected thanks to lower-than-expected power prices but the country has achieved its emissions reduction target faster than expected thanks to increased use of low-polluting gas.
Asia wants a slice of the future carved out by the US or, as JP Morgan puts it: “We think policy directives (on reduced coal and nuclear power use) incrementally support our view of robust medium-to-long-term LNG demand growth, which, in turn, supports incumbent LNG supplier nations and companies”
The situation in Japan is well understood with that country mothballing most of its nuclear reactor fleet in the aftermath of Fukushima, which remains an environmental mess.
In Korea a more muted but nevertheless equally significant change is underway with a government appointed advisory panel recommending a reduction in the role of nuclear in the country’s future energy mix.
Rather than accounting for up to 41% of Korea’s energy requirement by the year 2030 the panel suggests a nuclear power target of 22%-to-29%.
Based on that cut in the nuclear power contribution, and an assumed 3% growth in electricity demand, JP Morgan calculates the country will need an extra 23 million tonnes of LNG a year to ensure a steady supply of low-polluting energy.
A similar situation could also be emerging in China where the municipal government in Beijing decided to shut the city’s last four coal-fired power stations in order to reduced high pollution levels.
Replacing the last four coal-fired power stations in Beijing will lead to a need to acquire an additional 3.1MMt of natural gas a year, sourced from domestic supplies and imported LNG.
“Increasingly popular opposition to nuclear power generation in North Asia and a concerted push to improve air quality in China’s cities are durable and investable themes,” JP Morgan said.
“We continue to believe that growth of the global LNG market will be constrained by supply rather than demand.”
In other words, demand for LNG is highly likely to outstrip supply, no matter how fast supply can grow because the future is gas.