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Analysis: Small-scale Asian LNG projects facing big challenges

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Analysis: Small-scale Asian LNG projects facing big challenges

Highlights


SE Asian LNG demand to nearly quadruple by 2025 to 40 mil mt/year

Small-scale LNG demand to remain low and scattered

Singapore's breakbulk hub role faces big challenges

Singapore's move to accommodate smaller LNG ships is yet another step by the island state towards realizing its ambition of becoming Asia's LNG trading hub.

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Its main target market is Southeast Asia, the world's third most populous region and its fastest growing LNG demand center, with consumption due to nearly quadruple from 10.8 million mt in 2017 to 40 million mt/year by 2025, according to S&P Global Platts Analytics, driven by upstream output decline and growing consumption from the power and industrial sectors.

The region's growth potential is so significant that the end of the forecast period of structural oversupply, which is expected to extend into the 2020s, is likely, in part, to be determined by how quickly these new demand centers absorb the excess volume.

The disperse nature of Southeast Asia's geography and energy demand, scattered over thousands of islands, means smaller LNG ships, small-scale regasification terminals and breakbulk LNG hubs would be required to deliver the gas molecules to some of its future customers.

Singapore's expanding LNG infrastructure, its strategic location in one of the world's busiest shipping waterways, and reputation as a global trading hub for other commodities makes it a perfect candidate for the job.

The challenges it faces are, however, staggering.

ASEAN's key gas/LNG infrastructure


A FRACTION OF DEMAND


First, Southeast Asia's small-scale LNG demand is, and will remain, a fraction of its overall consumption.

Only one small-scale terminal is currently operating in the region -- a floating receiving terminal docked at Benoa port in Bali. The facility received nearly 200,000 mt of LNG from the Bontang export plant in 2017, below its 300,000 mt of LNG capacity, according to cFlow, S&P Global Platts trade flow software, to fuel Denpasar's 200-MW Pesanggrahan power plant.

Energy Research and Consultancy group Wood Mackenzie estimates small-scale LNG demand in Southeast Asia will reach between 3.5 million mt/year and 4 million mt/year by 2025, up to 10% of the region's overall forecast consumption, with around 70% coming from Indonesia, and the other 30% from the Philippines.

"Vietnam and Myanmar have expressed their intention to enter the market, but it is still quite speculative at the moment," said Edi Saputra, senior analyst for gas and power at Wood Mackenzie.


DISECONOMIES OF SCALE


Second, this relatively small volume is vastly scattered, so it would require many new small-scale regasification projects -- some as small as 10,000 mt/year, Saputra said -- as well as other associated supporting import infrastructure, gas distribution pipelines and skilled labor to operate the new facilities.

This could substantially raise the cost per unit of regasified LNG due to diseconomies of scale, and the fact that unlike oil, the cost of transporting and handling LNG relative to its market price is significant.

"The size of the power plants in the existing projects range from small -- around 10 MW -- to large combined-cycle units of 500 MW," Saputra said. "We estimate that projects below 40 MW are too small to be economic."


DOMESTIC PRICE CHALLENGE


Thirdly, the financing of these projects face the additional challenge of price regulation, and the difficulty of passing the cost of international LNG prices to downstream consumers in the subsidized power generation feedstock markets of Southeast Asia.

The expectation that the LNG glut would continue into the 2020s has created an incentive for governments in emerging Asian markets to accelerate energy reforms and support gas penetration in their downstream markets.

Indonesia issued new gas pricing guidelines on December 29, 2017, capping the trade margin of pipeline gas prices for power plants and industries at 7% in a bid to boost domestic gas use. Energy and mines deputy minister Arcandra Tahar also said earlier in February that the government planned to reduce gas prices for domestic industries by waiving the non-tax state revenue from the gas sector.

Indonesia's power utility Perusahaan Listrik Negara has recently secured domestic gas from Pertamina's Jambaran Tiung Biru gas field in the Cepu block at $7.60/MMBtu and $7/MMBtu under two separate deals, with other domestic gas purchases concluded in the range of $6.50-$8/MMBtu, according to a senior Indonesian official who declined to be named.

Meanwhile, international LNG prices are in an uptrend, supported by growing demand from China and rising oil prices. Platts JKM, a daily physical spot price assessment for LNG cargoes delivered into Japan, South Korea, China and Taiwan, averaged $7.12/MMBtu in 2017, up from $5.72/MMBtu in 2016.

The benchmark has stayed above $10.50/MMBtu through mid February on persistently cold weather across Northeast Asia.

Crude oil prices will also be a key factor driving demand for small-scale LNG in Southeast Asia, given the new power generation projects in the region are based on oil-to-gas switching, and are therefore very sensitive to international oil prices.

"Standard-size LNG projects of 5,000 cu m [of storage capacity] will require oil prices of $60/b or above to be commercially viable," Saputra said.


CLUSTERING DEMAND


Despite the challenges, Pertamina and PLN have shown commitment to build small-scale LNG to generate power plants in the central and eastern parts of Indonesia as well as other remote areas, Pertamina's strategic adviser to gas directorate Salis Aprilian said Thursday.

The solution is to expand downstream use of gas, and create gas demand hubs where the LNG can be distributed by small vessels or ISO tanks, he said.

"Technically, small-scale LNG is very effective, but not commercially viable. Indonesia needs more industries besides PLN to use the LNG," Aprilian said.

Last year, Indonesia's Minister for Energy and Mineral Resources Ignasius Jonan told local media the government was considering using Singapore's LNG terminal on Jurong Island to reload Indonesia-sourced LNG into smaller vessels for delivery into Indonesia's small-scale terminals.

From 2019, state-owned Singapore LNG's secondary jetty, initially designed for vessels with 60,000-265,000 cu m capacity, will be able to accommodate smaller ships of 2,000-10,000 cu m, which would allow for breakbulk.

"Such an undertaking is to signal to the market that we are prepared to spend money to develop this small-scale LNG business," SLNG CEO John Ng told local media last month.

"What Singapore has done is a good start," said Saputra.

Looking forward, the deployment of gas-fired distributed generation and micro grids in remote areas would increase consumption, while clustering demand centers together and reaching new sectors would make those demand centers more sizable, he added.

--Abache Abreu, abache.abreu@spglobal.com

--Anita Nugraha, newsdesk@spglobal.com

--Edited by Irene Tang, newsdesk@spglobal.com