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Viewpoint: Clean air goals key to Asian LNG demand

28 Dec 2017, 4.04 am GMT

Viewpoint: Clean air goals key to Asian LNG demand

Singapore, 28 December (Argus) — Government attempts to reduce air pollution by cutting consumption of coal in favour of natural gas are likely to be the biggest drivers of Asia-Pacific LNG demand in the near term, potentially helping absorb supplies from new liquefaction projects that are scheduled to hit the market in 2018.

Three of the world's four largest LNG importers — China, India and South Korea — are aiming to boost gas consumption as part of efforts to cut reliance on coal and nuclear power for environmental and safety reasons. The three countries collectively accounted for around 30pc of 2016's global LNG imports, behind the largest importer Japan.

China's winter woes

China is pushing strongly to cut coal use under its 13th five-year plan. The government is targeting a 10pc reduction in coal consumption in 2020 from 2015.

Chinese LNG imports have soared this year, thanks to plans to replace coal-fired boilers with gas and electric heaters in northern cities. LNG imports in January-October were 29.2mn t, already surpassing total 2016 imports of 26.2mn t. The rising demand suggests China could overtake South Korea as the second largest LNG importer in 2018. Korea imported some 33.5mn t of LNG in 2016, with imports hitting the same level in January-October 2017.

The switch to gas has unleashed stronger demand for LNG, as domestic output growth fails to keep pace with demand. This has emphasised a greater seasonality in LNG prices than had been anticipated.

Aggressive coal-to-gas conversions have left many rural provinces without gas supplies because of a lack of pipeline connectivity. This, coupled with falling temperatures, has led to severe gas shortages this winter. Import terminals in north China are operating at maximum capacity, while utilisation rates at terminals in the south have also risen to cope with increased imports.

Authorities have cut gas supplies to industrial users as they prioritise residential demand for heating, and ordered utility Huaneng Power to restart some coal-fired generation capacity in Beijing. These are short-term measures aimed at meeting power and heating needs this winter, and Chinese LNG imports are expected to rise further in 2018 as coal-to-gas conversions continue. But the scale of buying may not be as aggressive as in 2017 unless bottlenecks in the gas pipeline network and at regasification terminals are overcome.

China's appetite for LNG has tightened spot supplies in recent months and has been a key factor in the steep rise in spot LNG prices to a three-year high. Prices have strengthened despite the addition of almost 20mn t/yr of new liquefaction capacity in 2017, from the PFLNG1 floating facility and the 3.6mn t/yr train 9 at Bintulu in Malaysia, the fourth 5mn t/yr train at Sabine Pass in the US, the first 4.45mn t/yr train at Australia's Wheatstone and 5.2mn t/yr at Russia's Yamal project.

Production has been largely stable at most LNG export facilities in 2017. But the ANEA has doubled from its low of $5.41/mn Btu April, underscoring the strength of demand, to be assessed at $11.295/mn Btu for the second half of January on 27 December.

Korea revises its power mix

Like China, South Korea and India are targeting a higher proportion of gas in their respective energy mixes.

Seoul is calling for a move away from coal and nuclear in favour of renewables by 2030 in a new plan for the power sector. The government wants LNG to have a 27.3pc share of power generation capacity by 2030, up from a targeted 14.5pc in its previous power plan but down from the current level of 31.9pc.

Low utilisation of gas-fired units in Korea means such plants account for just 16.9pc of total power output, well below their share of capacity. The new plan aims to raise this to 18.8pc over the next decade, with gas-fired plants then scheduled to become the leading source of power generation with a capacity increase to 47.5GW in 2030 from 37.4GW currently.

South Korea's LNG imports have also risen in 2017, amid shutdowns at nuclear reactors for maintenance and safety checks following two major earthquakes since September 2016. The country imported 33.5mn t of LNG from January to November, up by some 13.5pc from the same period a year earlier.

Korea has 24 nuclear reactors, 10 of which are off line as the country heads into the deep winter. Seoul plans to accelerate shutdowns of old nuclear plants and will not approve any new plants aside from those that are already being developed. State-controlled gas aggregator Kogas has been buying spot cargoes to replenish drawn down inventory levels, with the higher LNG consumption likely a result of lower nuclear output.

India sets ambitious targets

India is seeking to increase the share of gas in its energy mix to 15pc from around 6pc, while also doubling LNG regasification capacity to 56mn t/yr in the next three years. State-run aggregator Petronet forecasts domestic LNG demand will grow by 8-10pc/yr over the next few years from 18mn-19mn t in 2016.

Delhi wants to add pipeline gas connections to 10mn households by 2019. State-controlled gas distributor Gail plans to double the existing pipeline network infrastructure by 2020, with it already having begun construction in the northeastern states.

But the Indian government policies may not have as immediate an impact as the measures being pushed by Seoul and Beijing. India needs to install new gas pipelines, as well as add more gas-fired plants and regasification facilities. And the government will have to maintain its commitment to gas despite potentially higher costs — with the recent policy reversals in China amid winter gas shortages illustrating that the shift to cleaner-burning gas carries unexpected risks.

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