HIGH oil prices are not the only big energy story of the moment. Also grabbing headlines is the great promise of liquefied natural gas (LNG), shipped across the seas from distant gas fields to demand centres in the Asia-Pacific region.

Singapore is the latest country to become an LNG enthusiast. Dr Vivian Balakrishnan, Minister of State for Trade and Industry, told Gasex – a major international gas industry conference held in Singapore recently – that the Government wants to make the island state a regional trading centre for LNG similar to its role in oil trading, as well as possibly importing more LNG to complement its natural gas supply from Indonesia and Malaysia.

Indonesia, long a major LNG supplier to North-east Asia, is also looking at consuming LNG domestically, taking LNG shipments from fields in the far east of the archipelago to Java, to fuel desperately-needed new power generation on the country’s most heavily populated and industrialised island.

Meanwhile, on the other side of the Pacific, Australian Prime Minister John Howard stopped in California in the United States on his way to Washington, to visit state governor Arnold Schwarzenegger, in order to promote plans by the Anglo-Australian company, BHP Billiton, to export Australian LNG to the state.

BHP’s scheme is one of several competing to become the first suppliers of LNG to the west coast of the US and Mexico. Mr Howard similarly took a direct role in the ultimately successful wooing by Australia’s North West Shelf LNG facility of China for the latter’s first-ever LNG import contract, signed in 2002.

These are just a few developments pointing to the new forces shaping the world of LNG east of Suez. Markets are expanding, new producers from the Middle East to the Russian far east and South America are entering the industry and new buyers are emerging, from India and China in the East, to the US and Mexico in the West.

Clearly, the LNG industry is becoming bigger, more competitive and more innovative.

LNG consumption in the Asia-Pacific region could almost double by 2015. Last year, 77.5 million tonnes of LNG – at a value of nearly US$20 billion (S$34.4 billion) – were sold to Asian markets, of which 55.8 million tonnes were taken by Japan: 1 million tonnes of LNG can support approximately 1,000MW of power generation over a year. (1MW is enough energy for 2,000 five-room HDB flats in a month.)

By 2015, the Asia-Pacific trade could reach 150.5 million tonnes with the addition of new markets in China, India, the US west coast, and within South-east Asia.

The new dynamics in the industry promise to transform LNG into a commodity-like fuel for large markets similar to oil and coal, and – as is the situation in North America and Europe – in the supply of pipeline natural gas.

Until now, LNG has been only a relatively limited source of energy in Asia, geared primarily to Japanese needs, and, more recently, markets in South Korea and Taiwan. From its historical role as a high-priced fuel for niche markets, almost a ’boutique’ fuel, LNG seems to be on the way to becoming a mass market fuel, attractive both commercially and environmentally.

Energy demand and supply patterns in Asia could be revolutionised if much larger volumes of LNG were supplied at a lower price and under more flexible contract conditions, similar to those now found for coal and oil.

Great benefits would flow to the region. Natural gas is a very efficient and clean fuel. There is minimal environmental impact from its production, shipment and combustion. Of all the fossil fuels, it produces the least emissions of carbon dioxide and other greenhouse gases and negligible sulphur dioxide and nitrous oxides.

On the supply side, producer countries would clearly gain from greater exports. Also, countries with strong financial, shipping and trading centres could also find new roles in the LNG business. The equipment supply spin-offs are also important. Already the current boom in the LNG business is resulting in order books overflowing at Japanese and Korean shipyards.

Yet, until now, natural gas supply in Asia has been limited by the distance of many demand centres from major gas fields. Long-distance pipelines have not been practical and LNG has been an expensive option. Just 10 per cent of Asia’s primary energy consumption (including oil) is met by natural gas compared with 25 per cent in North America and approaching 40 per cent in western Europe. In Russia, it is more than 50 per cent.

Historically, LNG production in the region focused on Japanese demand and, more recently, markets in Taiwan and South Korea. Japan fostered LNG development after the oil shocks of the 1970s, when it turned to LNG, although highly priced, in order to diversify its energy sources. Japanese finance underpinned gas field and LNG plant development in Indonesia, Brunei, Malaysia and Australia.

Until recently, LNG production was dominated by the majors, such as Shell and Mobil (now ExxonMobil), with considerable direction and participation by governments and state-owned companies, such as Malaysia’s Petronas and Indonesia’s Pertamina.

Buyers were also limited to the few large private power and gas utilities in Japan and the state-owned utilities and oil companies in South Korea and Taiwan. Contracts were very long term (20 to 25 years) and tended to be rigid. Prices were linked and closely indexed to changes in oil prices.

These conditions, it was argued, were necessary to secure finance for the multibillion-dollar costs of LNG production facilities, upstream gas fields, shipping and regassification plants. Buyers, in turn, accepted these as the price of energy security.

But much has changed in the last five years. The LNG industry is becoming much more dynamic as a result of new buyers and sellers. India and China have become LNG buyers. The US west coast seems certain to take LNG shortly and it must take LNG from the Asia-Pacific region, as the Panama Canal is too narrow to allow passage of LNG carriers from plants in the Caribbean, and west and north Africa. Shipments can move though from east to west through the Suez Canal. Mexico is also to take LNG, mainly to fuel power, and pipeline gas supply to California.

South-east Asia may soon become an LNG consumer with the Philippines planning to take LNG from Indonesia. Singapore is also considering taking LNG and Indonesia itself may ship LNG into Java from Indonesian Papua.

In the established North-east Asian markets, the demand side has become more diverse with more buyers, as a result of the liberalisation of domestic gas and supply industries.

Concerns to cap and reduce the growth of greenhouse gas emissions are also an advantage for LNG. The Japanese government, a signatory to the Kyoto accord of the United Nation’s Framework Convention On Climate Change, is putting in place regulatory measures that promote the use of natural gas.

On the production side, an array of new projects are under way. The Middle East is sharply expanding supply, especially from Qatar. Iran, with huge gas reserves, is also intent on becoming a very larger producer. Yemen and the Russian far east are possible suppliers.

South America may also become a supplier from its Pacific coast; it has plans to pipe gas from Bolivia to Chile or Ecuador. Peru also is looking to supply the US west coast.

Technological change and economies of scale in plant size and shipping capacity are enabling LNG to be more competitive with other fuels in terms of price and ease of delivery. In 1990, the average cost of LNG after production, liquefaction, shipping and regasification was US$3.50 to US$4.20 per million British Thermal Units (BTU). By 2000 that had fallen to US$2.75 to US$3.40 per million BTU.

Greater supply and demand diversity and technological change are being accompanied by greater commercial contract flexibility. Rigid long-term contracts are being complemented increasingly by shorter term contracts and more flexible terms and conditions.

Shipping destination restrictions are being relaxed. Contract provisions have usually prevented a buyer facing a drop in demand in his domestic market from being able to ship a cargo already purchased from the producer on to another customer.

Prices are falling as links with oil prices become weaker. New contracts with China have far less weight on oil prices than the traditional Japanese long-term contracts.

Future supply to the US could force radical change to the industry in the Asia-Pacific region. Producers would sell into what is already a very large and competitive domestic gas market supplied by Canadian and US fields. They would likely have to sell cargoes on short and spot-term basis, accepting US market prices and hedging against risk with various futures and other financial instruments.

Such trade is similar to what already happens for crude oil and oil products supply in the Asia-Pacific region and, to some extent, for coal. A share of the LNG business in the Asia-Pacific region may also come to be under spot-trade conditions. The Singapore Government is one which has identified a potential role for the island state as an LNG trading centre alongside its long-standing role in oil trading.

But there are different views as to how extensive spot trade might become. Some argue that the still high capital costs of production, limited size of the LNG carrier fleet and technological constraints mean that long-term and medium-term contracts will continue to dominate the business.

On the demand side, many buyers, especially in countries such as Japan, still want contract security against price volatility and shortages.

LNG supporters say however that these arguments were once also made against oil when it was predominantly sold under long-term contracts.

In summary, the LNG industry in the Asia-Pacific region is poised for take off. The demand potential is unquestionable; the questions that remain are whether there are barriers to its progress – such as commercial practices and government regulations – that can be removed and whether there are other actions that governments and developers can take to accelerate its expansion.

# The writer is a Visiting Research Fellow at the Institute of South-east Asian Studies.