IEEJ:May 2003

An Outlook for Natural Gas Market

in the APEC Region
Symposium on Pacific Energy Cooperation(SPEC) 2003
Tokyo, 12-13 February 2003

Yonghun Jung, Ph.D

Vice President

Asia Pacific Energy Research Centre, Tokyo

IEEJ:May 2003

Table of Contents
Overview of AEO 2002
Outlook for Natural Gas in APEC

Changing Landscape of LNG Business

Supply Cost Reduction

Regional Comparison for LNG Pricing

Natural Gas Projects in China
Net Back Pricing
An alternative way of natural gas pricing

Implications

IEEJ:May 2003

Total Primary Energy Supply in APEC

(1980-2020)
TPES growing at an annual rate of 2.1 percent (1999-2020)
Mtoe
10000

NRE 1.1 % p.a.

9000
Nuclear 1.7 % p.a.

8000

Hydro 2.7 % p.a.

7000
Natural Gas 2.6 % p.a.

6000
5000

Coal 2.1% p.a.

4000
3000
2000

Oil 2.1% p.a.

1000
0
1980

1990

Oil

Coal

1999

Gas

Hydro

Source: History: IEA (2001), Projection: APERC (2002)

Nuclear

2010

New and Renewables

2020

IEEJ:May 2003

Natural Gas: Incremental Growth by

Sector and Region (1999-2020)
Power sector will drive
natural gas demand growth

North America, Russia and

China absorb two-thirds

Mtoe
600
Russia
19%

500

North America
34%
China
14%

400

300

Oceania
2%
Southeast
Asia
9%

200

100

0
Power
generation

Industry

Source: APERC (2002)

Transport

Commercial

Residential

Latin
Am erica
Northeast 12%
Asia
10%

IEEJ:May 2003

Outlook for Natural Gas by Region

(1980-2020)
2500

North America
Southeast Asia
Russia

Latin America
Oceania

Northeast Asia
China

Annual Growth Rate

of Natural Gas by
Region

2000

Russia
China
Oceania
Southeast Asia
Northeast Asia
Latin America
North America

Mtoe

1500

1000

1980-1999 1999-2020
2.0%
4.2%
8.3%
5.6%
2.6%
10.7%
3.9%
7.2%
3.3%
3.1%
6.3%
0.7%
1.8%

500

0
1980

1990

1999

2010

2020

Source: History: IEA (2001), Projection: APERC (2002)

Note: IEA data for Viet Nam is available from 1986 onwards and Russian data is available from 1992 onwards,
hence these are respectively included from 1990 and 1999 onwards.

IEEJ:May 2003

Changing Landscape of LNG

Business
Rationale for the long-term contract
LNG projects are characterised as capital intensive.
Upstream
development,
liquefaction,
transportation,
regasification and storage requires huge investment.

Strong long-term commitment for the purchase and

sales is required between sellers and buyers.

Changing Landscape of LNG Business

Cost reduction on construction of liquefaction facility
and LNG tankers
About 30 percent cost reduction

Large uncommitted supply potential

Emergence of short-term market
Spot cargo deals in addition to cargo diversion

IEEJ:May 2003

LNG Supply Cost Reduction

Technology development and improvement in operation helped
reduce the total supply cost.
4.5

$/MMBtu

500

3000

Liquefaction (Left-handed)
4.0

450

3.5

400

Shipping (Right-handed)
2500

350

3.0

2000

$/t/y

2.5
2.0

250

1500

200

1.5

1000

150

1.0
100

500

0.5
50

0.0
Low in 1990
Regasification

High in 1990
Shipping (LNG tanker)

Low in 2000
Liquefaction

High in 2000

0
MLNG 1

Qatargas

Oman LNG

Qatar

Upstream Development Cost

Source: Poten & Partners

Source: CEDIGAZ

Note: MLNG1: 1983 grass-roots, Qatargas: 1996 grassroots, Oman LNG: 2000 grass-roots, Qatar: 2000
expansion

$/m 3

300

IEEJ:May 2003

Regional Comparison of LNG Pricing

Japan
LNG prices are based on a basket of crude oils, called the Japanese
Crude Cocktail (JCC).
Efforts have been made to allow flexibility in the contract arrangement.
Recent renewal of contract for TEPCO and Tokyo Gas with MLNG includes
partial FOB transportation.

Europe
LNG prices are predominantly linked to fuel oil prices and light oil. In
some cases, LNG prices are linked to a basket prices of fuel oil, light oil
and coal.
Recent development of LNG pricing includes new indices such as
electricity pool prices.
Contract between Trinidad and Tobago and Spains Gas Natural

US
Generally LNG prices are linked to the prices of Henry Hub. Prices
adjustment is made depending on the location of the LNG terminal.
Source: IEA (2002), Flexibility in Natural Gas Supply and Demand, TEPCO (2002), Press
Release

IEEJ:May 2003

Monthly LNG Prices in Japan, Korea,

Europe and USA (2000-2002)
Annual Average Prices (Unit: MMBtu)
Price surge due to the cold
w eather and demand
increase.

10.00
9.00
8.00

2000

2001

2002

LNG Im port Price to

Japan

4.7

4.6

4.2

LNG Im port Price to

Korea

5.1

4.9

4.1

Henry Hub, La.

$/MMBtu

7.00
6.00
5.00

4.2

4.1

3.3

LNG Im port Price to

US

3.4

4.1

3.1

LNG Im port Prices

into Europe

3.2

3.7

3.1

4.00
3.00
Surge as a result of oil
price increase

2.00
Price drop due to the slow
dow n in demand

1.00

Henry Hub, La.

LNG Import Price to Japan
LNG Import Price to US

02/11/1

02/9/1

02/7/1

02/5/1

02/3/1

02/1/1

01/11/1

01/9/1

01/7/1

01/5/1

01/3/1

01/1/1

00/11/1

00/9/1

00/7/1

00/5/1

00/3/1

00/1/1

0.00

LNG Import Prices into Europe

LNG Import Price to Korea

Source: Energy Intelligence Group (2003), World Gas Intelligence, IEA (2002), Energy Prices and Taxes

IEEJ:May 2003

Current LNG Pricing in Japan

Price Formula
P = 0.1485 * JCC + alpha
P: LNG Price in $/MMBtu
JCC (Japan Crude Cocktail): CIF price of a basket of crude oils into
Japan in $/bbl
alpha: a constant which is project specific. Around 90 cents/MMBtu for
CIF sales

An example: LNG Price formula for Chubu

Electric Company and Qatar
P = 0.1485 * JCC + $0.8675 + S
P: LNG Price in $/MMBtu
S: S changes depending on the level of JCC.
JCC is in the range of $23.5 to $29.0 --- S= (JCC-$23.5)/($23.5-$29.0)
JCC is in the range of $16.5 to $23.5 --- S=0
JCC is in the range of $11.0 to $16.5 --- S= ($16.5-JCC)/($16.5-$11.0)
Source: Middle East Economic Survey (2001)

IEEJ:May 2003

Correlation between LNG Price and

Crude Oil Price
7.0

$/MBtu

Y = 0.12253*CRUDE + 1.2874
6.0

LNG Price (CIF)

5.0
4.0
3.0

Note: Crude oil price adjustment factor

denoted by S is not included, therefore,
coefficient and constant is different from the
explanation mentioned in the previous slide.

2.0
1.0
0.0
10

15

20

25

Oil Price (CIF)

30

35

40
$/bbl

Source: IEA (2000, 2001), Energy Prices and Taxes for LNG price and
EDMC Database (2002) for Crude Oil Price

IEEJ:May 2003

Natural Gas Projects in China

Ulumqi
Luntai

Shanshan
Baxian

Korla
Tazhong

Dunhuang

Seibu

Beijing

Tianjin

Yinchuan
Yongging
Golmud

Lanzhou

Jingbian

West Bohai
Gas Field

Xian
Sichuan

Shanghai

Kaijian
Wuhan

Pinghu
Gas Field

Dianjian

Fujian

Pipelines built
in/before 2000
Piplines planned or
under construction

Guangdong
Hong Kong
Hainan

Source: APERC (2003)

Yacheng 13-1 Gas

Field

IEEJ:May 2003

LNG Projects in China:

Guangdong and Fujian

Guangdong LNG
Supplier: Australia LNG
Contract amount: 3 million
ton/year and 5 million
ton/year by 2008

Fujian LNG
Supplier: BP Indonesia
Contract amount: 2.5 million
ton/year

Estimated LNG supply cost

for China is approximately
30%-40% lower than that of
Japan and Korea.
Any impact on lowering the
LNG price for the
neighboring economies?

Breakdown of estimated cost

of sending LNG to China
Unit: $/MMBtu
BP Indonesia:
Fujian

ALNG:
Guangdong

Qatar

Wellhead gas
cost

0.60-0.80

0.65-0.95

0.55-0.75

Liquefaction
cost

0.45-0.65

0.40-0.60

0.40-0.60

Transportation
cost

0.45-0.65

0.65-0.85

1.0-1.10

Regasification
cost

0.30-0.60

0.35-0.55

0.40-0.60

Minimum CIF
cost

1.80

2.05

2.35

Source: HSBC (2002)

IEEJ:May 2003

Breakeven Gas Price against Coal for Power

Generation (Unit: $/MMBTU)
APERC
(2001)
Beijing
Hebei
Neimenggu
Liaoning
Jilin
Heilongjiang
Shandong

Shell
(2000)

2.3 - 2.8 4.1 - 4.75

2.5 - 2.9 4.1 - 4.75
2.0 - 2.3
2.8 - 3.6
2.7 - 3.2
2.5 - 2.9
2.5 - 2.7 5.95 - 6.8

Source: APERC (2001), Shell (2000)

Note: Breakeven gas price is determined by comparing a coal plant with
US$740/kW against CCGT with US$450/kW both earning 12% IRR.

IEEJ:May 2003

The Netback Market Value Concept

Netback =

Delivered price of cheapest alternative fuel

to the customer (including any taxes) adjusted for any
differences in efficiency or in the cost of meeting
environmental standards/limits;
Minus cost of transporting gas from the beach or border to the
customer;
Minus cost of storing gas to meeting the customers seasonal or
daily demand fluctuations;
Minus any gas taxes.

Source: IEA (1998), Natural Gas Pricing in Competitive Markets

IEEJ:May 2003

Case 1: Assumptions

600 MW Heavy Fuel Oil Plant

Thermal Efficiency
Capacity
Capacity Factor
Capital Investment Cost

600 MW C.C. PLANT

36
600
60
2,333

%
MW
%
$/kW

Thermal Efficiency
Capacity
Capacity Factor
Capital Investment Cost

Source: APERC Database (2003)

Note: Net back gas price is determined by comparing a diesel plant with
US$2,333/kW against CCGT with US$1,667/kW both earning 4% IRR.

46
600
85
1,667

%
MW
%
$/kW

IEEJ:May 2003

Case 1: Result
7.0
6.0

$/MMBtu

5.0

Y = 0.1485*CRUDE + 0.9

4.0
3.0
2.0

Y = 0.1320*CRUDE + 0.3235

1.0
0.0
0

10

15

20

25

30

35
$/bbl

Source: APERC (2003)

LNG CIF Price

LNG Netback CIF

Note 1: Net back price of natural gas is derived by adjusting heavy fuel oil price in a range
between 21.24 $/bbl and 25.61 $/bbl.

IEEJ:May 2003

Case 2: Assumptions

1,000 MW Coall Plant

Thermal Efficiency
Capacity
Capacity Factor
Capital Investment Cost

1,000 MW C.C. Plant

42
1,000
80
2,500

%
MW
%
$/kW

Thermal Efficiency
Capacity
Capacity Factor
Capital Investment Cost

Source: APERC Database (2003)

Note: Net back gas price is determined by comparing a coal plant with
US$2,500/kW against CCGT with US$1667/kW both earning 4% IRR.

46
1,000
85
1,667

%
MW
%
$/kW

IEEJ:May 2003

Case 2: Result
7

4.1$/MMBtu 5.9$/MMBtu

6
3.9$/MMBtu 4.5$/MMBtu

$/MMBtu

5
2.8$/MMBtu 3.4$/MMBtu

4
3
2
1
0

Coal Price for Power

Source: APERC (2003)

Gas Price for Power

(Actual Value)

Gas Price for Power

(Net Back Value)

IEEJ:May 2003

Implications
Large-scale capital investment requirement for natural
gas infrastructure development is a stumbling block
for its further penetration.
Long-term, rigid commitment between the supplier and buyer has been
the practice for the LNG contract.

However, recent technology improvement and

operational efficiency have resulted in the significant
cost reduction of LNG supply chain.
Deregulation of importing economies calls for flexible
terms in long-term contract.
LNG contract may need to be restructured to respond
to the changes in the market.
Volume flexibility
Pricing scheme