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Asia’s LNG Markets Breaking Down, Reform Comes Next
Unmoored pricing, declined delivery, mothballed capacity, asset sales, write downs.
A Pan-Asian Gas Pipeline (at left, above) provides Asia a much longer, lasting, flexible, economically-valuable energy infrastructure than single-generation, greenhouse gas-intensive Liquid Natural Gas.
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Asia’s LNG market is in multi-hundred billion dollar chaos. Counter intuitively, that’s good news for the future.
The reason? The intra-Asian LNG industry is a result of government capture by fossil fuel interests. It makes no sense on reasonable economic grounds.
The distorted results are now on display: bloated construction costs in Australia, environmental degradation in the Great Barrier Reef), overcharged buyers in Japan and uncounted/uncosted carbon emissions everywhere.
LNG oversupply is creating an active Asian LNG ‘spot market’ to the horror of insiders. It’s stripping the veil from this overpriced, misinvested industry.
A painful economic process of adjustment has several years (and bankruptcies) to run. It won’t be pretty. It could have been avoided.
Had proper economics been applied from the start, an intra-Asia LNG industry wouldn’t have taken root. Natural gas pipelines are better, cheaper and longer-lasting option.
Proper application of ‘demand-pull’ economic analysis would have shown this. Instead, the LNG industry sought ‘supply-push’ economic rents created by technological ‘lock in.’ The bet’s now gone bad.
The reason: for intra-regional trade, LNG has fundamental flaws.
Renewables are rapidly achieving cost parity with natural gas. This undermines the rationale for long-term investment in natural gas, let alone a grossly expensive, single-purpose bespoke infrastructure to deliver it.
Ignoring LNG’s carbon emissions distorts LNG’s poor investment economics. But nstead of making rational calculations based on all economic factors, the LNG industry flattered LNG’s economics by excluding carbon.
Adding carbon prices to LNG’s ‘life-cycle’ emissions raises costs dramatically. Faced with this problem, the LNG industry excluded carbon emissions (and their costs) as irrelevant. They won’t be irrelevant for long.
Global carbon market reform in the next five years will deliver broader coverage and much higher prices (to $20-$50 per tonne). These will expose LNG’s poor carbon economics.
Capital costs of pipelines are lower than for LNG. For intra-regional transport of natural gas, pipelines are a better deal on both economic and technology grounds. Government capture— however — tilted decisions toward more LNG, a more lucrative business for industry.
That bet’s now going wrong. The result is an albatross industry. The evidence: an oversupplied regional Asian LNG market in which spot market prices have fallen so low they now more than offset financial penalties of failing to honor long-term delivery contracts.
This, in turn, is rapidly breaking down the industry’s preferred sinecure of long-term pricing.
It’s the horror scenario for LNG insiders. They deliberately excluded key variables from their economic analysis. These include carbon pricing and the advantageous multifuel advantages of pipelines.
The current mayhem will mark the evolution of a regional LNG spot market priced on ‘demand pull’ signals generated by consumers instead of ‘supply-push’ factors favoring producers. That’s the market Asia should have gotten all along.
In response, some LNG shipping capacity and upstream natural gas production will be mothballed. This is already happening in Australia’s overbuilt LNG export port of Gladstone, Queensland.
Billions in write downs will follow in time. This will lead to revised calculations about the LNG’s market’s economic value. That in turn will lead to consideration of alternative delivery methods for natural gas that are less capital intensive and less vertically integrated.
An ideal new system would enable natural gas to be ‘pulled’ into the market as needed in response to demand instead of ‘pushed’ into the market by companies with expensive, bespoke, infrastructure to pay off.
At present, the problem is one of vertical integration. LNG producers mine the gas, build the LNG shipping facilities and LNG ships. They’ve bet the farm on everything going right with all three all the time.
By contrast, an open-access, common-carrier, multi-fuel pipeline would be built, operated and maintained by an unrelated middle party. Financing of natural gas transport would be divorced from the economics of upstream production and downstream sale.
A pipeline would sell access to all comers, changing transport prices in response to market demand. The example here is the United States. There, an open-access, common-carrier merchant pipeline network is open to all comers.
It features its own ‘spot’ market price (aka the Henry Hub) quoted on a day-to-day, moment-to-moment basis.
The future of global energy markets lies in networks such as this. They have proved themselves in telecommunications (the internet), electricity (Europe’s increasingly integrated grids) and now natural gas (the US merchant pipeline system).
Furthermore, ‘just in time’ inventory management lowers the albatross of idled, high-fixed cost investments — such as long construction lead time LNG facilities that are under utilized once finished. The only winners of that game are construction contractors.
This generates much better price signals than 20-year lock in, the model favored by the LNG industry on the grounds such certainty is required to justify large initial investment.
To learn more, visit www.grenatec.com
Grenatec is a research organization studying the viability of a Pan-Asian Energy Infrastructure (PAEI).
It would serve two billion people and one-third of the global economy
This commentary may be reprinted with attribution.