A global network of professional firms offering audit, tax and advisory services, KPMG member companies have successfully supported clients in handling business issues and major risks in the oil and gas sectors. The following is an excerpt of discussions on liquefied natural gas (LNG) and its future prospects by energy experts at KPMG Japan moderated by The Japan Times, prior to Gastech Japan 2017. Mina Sekiguchi, head of energy and infrastructure Japan, Tsuneo Miyamoto, head of oil and gas, and Shuji Miyasaka, head of power and utilities, participated.
Question: Tell us briefly the current situation regarding the overall energy demand in the world.
Miyamoto: Demand for energy has been steadily growing, especially in developing nations, including China, India and those in Southeast Asia.
Q: Electricity is created by thermal, hydro, nuclear power or renewable energy. Do you see any effects on power production sources due to the Paris Agreement on climate change?
Sekiguchi: Signatories are required not to emit carbon dioxide in the future, prompting them to use fuels free of CO2 emissions. The amount of CO2 released when generating power by burning natural gas is less than that produced by burning oil. This is expected to increase the commitment to natural gas.
Miyamoto: We have seen diversification in providers of natural gas. Providers used to be disproportionately located in the Middle East and Russia; but now Australia, North America and others have joined them.
Q: Oil prices have fallen since November 2014; has this influenced the supply and demand of natural gas?
Sekiguchi: The price of gas is linked to that of oil. Thus, a drop in the latter leads to a drop in the former, resulting in wider use of natural gas.
Q: So natural gas has become increasingly available. Global LNG demand is expected to rise to 500 million tons per year (Mtpa) in 2025, up from the previously forecast 238 Mtpa in 2014, according to the BG Group. What are some of the issues surrounding further usage?
Miyamoto: To further increase the demand for natural gas, the construction of gas receiving terminals and regasification infrastructure is essential. However, construction has not yet been facilitated in many ASEAN countries, which are expected to log increasing demand. Such LNG infrastructure is necessary to store and regasify it for distribution to inland users via pipelines.
Sekiguchi: There is “pipeline gas” and LNG. The gas itself is the same, but there is a completely different supply chain. Because countries like Japan and South Korea have to import gas via vessels, the gas needs to be liquefied, the process and facilities of which contribute to the overall higher cost compared with pipeline gas. Major oil players have started focusing more on their gas business since oil prices dropped. Today one of their strategic focuses is to create new demand, which may require investment in infrastructure in ASEAN countries. One of the noteworthy topics at Gastech is how to create the supply chain to deliver LNG to countries like Indonesia, which faces growing demand.
Miyamoto: Due to the higher cost, construction of LNG infrastructure is essentially not viable without securing long-term commitment from buyers, generally for a period of 20 years. However, due to the increase in supply, today we are increasingly seeing projects with uncontracted sales volumes.
Sekiguchi: It generally takes a long time to complete LNG terminals and it can sometimes be close to 10 years before the first shipment. This time lag can work favorably or unfavorably for producers and buyers in different ways. During this period, changes happen both in demand and supply, as well as in pricing. Some mega-sized projects in Western Australia have been completed in 2016 or are expected to be completed within a couple of years. Due to the change in the surrounding environment such as availability of labor, equipment and materials, many suffered from cost overruns or delays. Now because of lower oil prices, the spot price of gas stays low, too. The situation doesn’t encourage further investment into LNG infrastructure. Looking at the long-term future of gas, this is not a good sign. Without further investment into more LNG projects, we expect that within 20 years, we will have shortage of gas. For gas to play an important role as a greener, affordable and stable fuel, all the major players, regardless of whether they are sellers, buyers or traders, need to collaborate to develop a truly global LNG market.
Q: What role can Japan play in the face of an increasingly changing LNG market?
Miyamoto: In short, Japan is the biggest buyer in the world of LNG. The country imports around 80 to 90 million tons annually, about one-third of all LNG produced in the world. Thus, Japan has very strong bargaining power in the global LNG sector. Among others, Jera Co., a joint venture between Tokyo Electric Power Co.’s Fuel & Power, Inc. and Chubu Electric Power Co., purchase about 40 million tons per year. In other words, this joint venture alone purchases about 16 percent of total gas traded globally. I believe Japan, leveraging its strong bargaining power, is in the position to play a leading role to advance the LNG market. For instance, using its historical expertise in shipbuilding, Japan could contribute to design and construct vessels that will be fueled by gas instead of conventional oil. Using gas instead of oil on vessels could contribute to huge reductions in CO2 emissions.
Q: What is the current situation surrounding the Japanese energy market?
Miyasaka: Following the 2011 Great East Japan Earthquake, the country’s electricity market was liberalized in April 2016, as was the gas utilities market this April, enabling customers to choose their power and gas providers. A truly competitive market is evolving after a long history of regulated tariffs that allowed utilities to recover their costs in full. To date, the top priority for Japanese utilities has been stable and reliable supply without power interruption regardless of cost. With the market liberalization, for the first time in history, Japanese utilities are forced to also become conscious of cost optimization. Before market liberalization, utilities’ customers had no options with respect to their power or gas providers. Now they can buy from providers of their choice, meaning utilities need to provide more value and ensure customer satisfaction. Among other conditions, price is one of the most important factors. Accordingly, utilities need more flexibility around the conditions of fuel purchase. They used to buy gas on long-term contracts with prices linked to an oil index and with destination clauses that prohibited buyers from reselling to third parties. Recently their purchases include a portion of shorter-term contracts, as well as buying from the spot market. In short, from utilities’ standpoints, both the market they purchase gas from and the market they sell power to have become volatile. In this new environment, what is required for utilities now and for the future is understanding how to optimize the commercial assets they own.
Q: What is expected to happen to Japan’s future energy supply?
Miyasaka: The Ministry of Economy, Trade and Industry in 2015 announced the energy supply plan for the 2030 fiscal year. According to the plan, coal, LNG, nuclear power and renewable energy will each occupy roughly a quarter of the power source mix. However, whether or not the nuclear reactors restart or when, remains uncertain. If the restarts are delayed, it is possible that closer to 50 percent of total power will need to be produced by way of gas-fired power plants.
Sekiguchi: As of today, it is predicted that Japan will have more LNG than demand through 2040 even without restarting nuclear reactors. Once the nuclear reactors restart, the situation of oversupply would be accelerated. Japanese utilities need to secure agility in LNG trading to manage this uncertainty. This can only be done through constructing their ideal (gas) asset portfolio with a variety of terms, including long, short and spot, as well as through timely managing of the portfolio.
Q: So, flexibility in procuring LNG would further increase?
Miyasaka: Yes. One thing that allows utilities to secure agility is having various lengths of contracts with different pricing mechanisms. Then utilities can choose the optimal approach to realizing revenue from their assets, for example, either use the gas as a fuel to produce power to be sold, sell the gas to a third party, or even sell it in the highly fluid market. It is worth noting that there is no LNG commodity market in Asia as of today. However, there is increasing demand and discussion within the industry for the necessity of such a commodity market for several reasons.
Q: Are Japanese players engaging in establishing or improving trading practices for the future?
Miyamoto: Jera acquired the coal business
of EDF Trading from EDF in France. Additionally, Mitsubishi Corp. took a majority stake in an Irish energy trading company. Japanese players lag behind foreign companies in the field of trading, so they need to make forays into this area.
Miyasaka: For Japanese utilities, trading is quite a new area, but it is becoming increasingly important, as it is the core skill. It is no wonder that we see those M&A activities by Japanese companies.
Q: What do you expect from Gastech?
Miyamoto: It is so fortunate that we can be a part of this history-making discussion among major LNG players in the world at Gastech Japan.
Sekiguchi: We are standing on the threshold of ensuring the basis is properly formed for the long-term future of LNG. All the major players in the LNG global industry have to collaborate to resolve some short-term challenges to make LNG a green, sustainable and affordable fuel for the future. Among them, Japan has a significant role to play. I truly hope that Japanese players act not only based on what they want as private companies, but also on what is needed now to shape the ideal global LNG industry for tomorrow.
KPMG is a platinum sponsor for Gastech Japan 2017.
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