2. LNG supply security in Asia: An opportunity for traditional buyers?

2. LNG supply security in Asia: An opportunity for traditional buyers?

Introduction

The structure of the Asian liquefied natural gas (LNG) market is undergoing a major shift. While traditional LNG buyers Japan and Korea are forecast to see flat or declining demand, non-traditional buyers4 China, India, Pakistan and Bangladesh are driving most of the future growth in this region. They are less dependent on LNG as a source of natural gas supply, but they expect to expand imports rapidly to meet ever-growing gas demand that is surpassing domestic gas production and pipeline imports.

The graphs in Figure 28 cluster Asian LNG buyers in groups according to two primary metrics: LNG supply reliance (share of LNG in natural gas supply); and LNG buying commitment (share of longterm contracts within LNG supply). Countries clustered on the right of each graph are LNGdependent buyers, heavily reliant on LNG supplies because they have limited or non-existent alternatives. Such buyers are also characterised by a high share of long-term contracts within their LNG supplies, and this is forecast to remain the case over the next five years. The composition and size of this first cluster remains therefore unchanged in the medium term.

Figure 28. Evolution of Asian LNG buyer types (2010–24)

Note: LT = long term.

Sources: IEA analysis based on data from ICIS (2019), ICIS LNG Edge, https://lngedge.icis.com/ (subscription required); 2024 is based on LNG forecast import data from IEA (2019), Market Report Series: Gas 2019, https://webstore.iea.org/market-report-series-gas-2019.

The traditional clustering of Asian LNG buyers gives way to a more diversified structure.

4 This typology of LNG buyers was introduced in the Global Gas Security Review (IEA, 2017).

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Countries clustered on the left are more diversified buyers, with a more limited exposure to LNG as a share of gas supply due to the existence of domestic production and/or alternative pipeline import sources. These buyers also currently have a high share of long-term contracts within their respective LNG buying portfolios but, for most of them, their future growth in import needs has yet to be covered by additional long-term contracts, as shown by their position in the right-hand graph (2024) in Figure 28. The result is a simultaneous increase in the share of LNG in their gas supply and a decrease in the share of long-term contracts – based on contracts signed at the time of writing this report.

The subsequent supply gap could be bridged by a combination of additional long-term contracts and more short-term procurement. However, these emerging buyers are in general more pricesensitive than traditional buyers, and are thus more likely to opt for shorter-term supply options depending on the level of import prices. LNG, as an internationally traded commodity, naturally exposes the importing country to the globally traded price, which could be higher than the domestic reselling price. Therefore, this analysis is made on the basis that, for the medium term to 2024, the minimum demand for LNG is met through long-term contracts. The further increase in demand, which could be still supplemented by an increase in domestic production or pipeline imports, would be managed by a mixture of medium-term and short-term LNG contracts.

These emerging buyers are different from the traditional players. Japan and Korea have relied almost entirely on LNG for their natural gas supply and have been accepting long-term oil-linked contracts as the basis for the secure supply of gas. By contrast, many of the more recent entrants to the LNG market have their own gas production developed for domestic use and at lower prices. For example, Pakistan started importing LNG as an additional marginal source of gas supply in 2016. Its main source of LNG supply is a long-term contract with Qatar, using a pricing formula linked to the internationally traded oil price.5 As shown in Figure 29, the LNG contract price in Pakistan has been higher than that of the consumer price. The differential is USD 3 per million British thermal units (MBtu) on average since imports from Qatar began, and USD 5.6/MBtu at its peak.

Figure 29. Natural gas supply prices and average domestic consumer prices in Pakistan (2015–19)

8

6

4

2

0

Sources: OGRA (2019a), Consumer Gas Prices, www.ogra.org.pk/consumer-gas-prices; OGRA (2019b), Well Head Gas Prices, www.ogra.org.pk/well-head-gas-prices; OGRA (2019c), Regasified LNG Notified Prices, www.ogra.org.pk/rlng-notified-prices.

The oil-indexed contracted LNG price has decreased the attractiveness of imported LNG.

5 Pakistan entered this LNG supply contract following a competitive tender. The awarded contract has a pricing formula reportedly linked to the three-month average of Brent crude oil prices with a slope of 13.37%.

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bcm

Other emerging

Asia economies

Pakistan

India

Bangladesh

Average volume covered by contracts

IEA, 2019. All rights reserved.

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IEA. All rights reserved.