A pipeline alternative to Asian LNG

4 November 2014

An LNG site in Malaysia: the completion of a pan-ASEAN pipeline network could complement LNG trade.

Unprecedented growth in global liquefied natural gas (LNG) supply is adding 150 billion cubic metres (bcm) of LNG capacity that is already under construction or set to start in the next four years. But prospects for further natural gas demand and, in particular, LNG growth in key regions, have never been so uncertain.

The pricing picture is in full swing, too, with an average gap in 2013 between US and Asian gas prices of USD 12 per million British thermal units. This gap is responsible not only for the flurry of planned LNG projects targeting mostly Asia, but also for renewed Asian attempts to develop innovative and cost-cutting approaches to gas delivery.

Since the 1990s, the economic development of nations in the Association of Southeast Asian Nations (ASEAN) has led to a thirst for energy. The IEA expects more than 80% growth in regional energy demand through 2035 compared with 2011, as the economy triples and population expands by almost one-quarter. Coal will supply much of the new energy, but gas will also play a role, with 100 bcm in new demand lifting consumption to 250 bcm.

Early on in planning for the demand surge, ASEAN expected to rely on pipeline supplies. New output for distribution was, and still is, expected from the East Natuna gas field in the sea between Indonesia, Malaysia and Singapore. So energy ministers announced the Trans-ASEAN Gas Pipeline (TAGP) system in 1999 to connect existing pipelines for a fully integrated network that would also deliver supply from East Natuna. The region has extensive pipelines that in many cases cross borders – but such links are only binational. Aimed at enhancing security of supply and greater economic co-operation within the region, the TAGP is to connect gas reserves in the Gulf of Thailand, Indonesia, Myanmar and the Philippines to the rest of the region.

But over the past four years, LNG developed quickly as countries in the region built terminals, while the TAGP project lost steam. However, these terminals suffer from the inefficiencies of the global LNG market and are sometimes too large for smaller domestic demand centres. A 400 megawatt gas-fired plant needs about 0.4 bcm per year to run 5 000 hours per year – about four LNG cargoes per year.

New relevance for a regional network

Within this context, a new IEA report, The Asian Quest for LNG in a Globalising Market, finds that the TAGP project could still be a valuable solution. The network could provide flexibility and diversity of supplies within the region, based on both LNG and the development of East Natuna with the TAGP as backbone. For example, the TAGP could facilitate swapping gas within the region for an optimal allocation, through time or cargo swaps of LNG or via additional LNG imports through terminals in neighbouring countries.

The TAGP, however, faces several significant challenges:

• overcoming technical issues such as different gas quality and obstacles to developing East Natuna

• reconciling differences in market structures and pricing among countries

• moving from the existing bilateral cross-border pipelines system to an integrated and harmonised system

• harmonising regulation such as third-party access rules and regulatory authorities.

All of these issues limit the access of buyers, sellers or both from non-neighbouring countries to the imagined single network. In other words, many fundamental issues limit third-party access and hence the move to an efficient integrated network.

Overcoming the challenges to linkage

The East Natuna field has been difficult to develop, despite its substantial 1 300 bcm of natural gas. Located in a basin in Indonesia’s most northern territory in the South China Sea, it is far from the consuming areas. Another difficulty is the very high carbon dioxide (CO2) content of the gas, which would compound technical issues in aligning gas quality across the TAGP. In Singapore, for example, imported natural gas must comply with Gas Network Code specifications before it can be injected into the transmission system. The minimum methane level in Singapore is set at 80% of the volume, with CO2 no higher than 5%. But in Thailand, natural gas from onshore fields in the north-eastern part on average contains 76% methane and 13% CO2, while that from offshore fields in Myanmar contains 72.4% methane, 6.2% CO2 and 16% nitrogen.

The quality issue also applies to LNG. TAGP-facilitated swaps of LNG between terminals or between LNG and pipeline gas offer an opportunity to harmonise qualities system-wide. Without becoming an obstacle to new LNG supplies, quality could be managed at the import terminals before the gas is injected into the TAGP.

National systems impede regionalisation

Perhaps the greatest challenge for the TAGP is the different market structures found among the ten ASEAN member countries. For example, besides national monopolies in several nations, Thailand and Indonesia have vertically integrated companies, while Singapore is on a firm course towards deregulation with the unbundling of transport and commercial activities. Most countries do not provide efficient and transparent third-party access, even if there is regulation supporting this principle. Fulfilling the TAGP aim of a single network would involve harmonisation of regulatory oversight.

Other limitations to development are national policies that favour domestic energy use before considering exports – policies that limit the most efficient allocation of gas within the region. The most common form of favouring domestic energy users is through subsidies, which many countries in the region use to protect gas consumers from higher international market prices, a trend likely to worsen as countries become increasingly reliant on imports.

Connecting these diverse markets through a single pipeline network would enable access to the various countries. But the distinctions among national market structures would limit that access, as the parties’ interests and risks vary. The absence of third-party access to the transmission grid in some countries would hinder the creation of an integrated network in which gas would flow to where the highest prices are paid, which would create additional challenges for the countries with artificially low prices.

Network offers option to crowded market

Over the medium term, gas markets of non-OECD Asian countries will play a key role in attracting additional LNG supplies, according to the IEA Medium-Term Gas Market Report 2014. For Southeast Asia, LNG will always be necessary, as it brings flexibility and matches some countries’ island geography.

But ASEAN countries will be turning to a crowded market, as demand expands elsewhere, too. By 2019, total Asian LNG imports will near 150 bcm, more than Japan’s current world-leading deliveries. China will overtake Korea to rank as the second-largest overall gas importer behind Europe, relying on LNG as well as pipeline gas to maintain a diversified supply mix and feed its gas-hungry coastal region, which remains distant from pipeline or most domestic supplies. In India, LNG is the only likely source of imports over the medium term as pipeline projects remain a far-away dream.

As such, the requirements for ASEAN to develop import and transport infrastructure will be significant, and the competition for product high. As most Southeast Asian countries are interlinked bilaterally by pipeline, increasing these connections by reinvigorating the TAGP project can diversify delivery, buttressing the energy security crucial to the region’s economy.

This article and the sidebar below are by former IEA Senior Gas Analyst Anne-Sophie Corbeau and originally appeared in IEA Energy: The Journal of the International Energy Agency. Anne-Sophie Corbeau has left the IEA, joining the King Abdullah Petroleum Studies and Research Center as a gas expert. She previously worked at Cambridge Energy Research Associates and in Peugeot’s fuel cell and hydrogen department.

Singapore’s Opportunity

Singapore is trying to establish Asia’s first natural gas hub, which would depend heavily on LNG supplies. But as an ASEAN member, the country is also involved in the TAGP project. Developing both LNG and the pipeline network could prove synergistic rather than competitive: the TAGP could link Singapore with gas fields and LNG regasification terminals region-wide, enhancing supply security and diversity while increasing the hub’s liquidity. Further, a hub that provides a reliable, single-price reference for all TAGP transactions could end different cross-border price regimes, a key obstacle to the project’s success.

Over the longer term, Asia could have multiple trading hubs to capture differences among intraregional markets. Asia has no spot price, unlike Europe and North America, and the IEA is focused on the obstacles and opportunities for Asia-Pacific economies to establish natural gas trading hubs that allow gas prices to reflect local and regional demand and supply.

But most of ASEAN is far from fulfilling what the IEA sees as necessary to establish a regional hub: hands-off government approach, separate transport and commercial activities, sufficient network capacity and non-discriminatory access, wholesale price deregulation, a competitive number of market participants, and involvement of financial institutions. Without improvement in these areas, the TAGP cannot realise the synergies possible from a trading hub in Singapore or elsewhere.

For more information, download the IEA publication Developing a Natural Gas Trading Hub in Asia.

Through the end of 2014, the IEA regularly produced IEA Energy, but analysis and views contained in the journal are those of individual IEA analysts and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation. Click here to view past issues of IEA Energy.

Photo by Ahmad Afif Isa on Flickr, https://creativecommons.org/licenses/by/2.0/