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Gas & LNG

TEMASEK-backed Pavilion Energy on Thursday urged the liquefied natural gas (LNG) industry to develop LNG ecosystems, ahead of a rise in demand for the fuel.

Pavilion Energy chief executive Seah Moon Ming said: "There is a clear need to shift our thinking away from just supply-demand dynamics, towards investing ahead for a clean and sustainable future."

He was speaking at the LNG Producer-Consumer Conference in Tokyo, where Pavilion Energy announced its partnership with US marine transportation firm Harley Marine, Mitsui OSK Lines and Mitsui & Co to jointly take part in Singapore's LNG bunkering pilot.

Mr Seah said that, for a start, the LNG sector should not conceive of emerging countries as "demand centres" to absorb LNG; the focus should instead be on developing LNG solutions - transportation and marine fuel and building LNG ecosystems.

"These ecosystems can be introduced into emerging markets as a turn-key solution for supplying LNG as well as generating and distributing electricity to emerging markets."

Citing Myanmar as a country keen on powering its cities with LNG, Mr Seah noted that the LNG value chain there was still in its infancy and could take a long time to mature.

"Introducing an integrated LNG ecosystem would not only speed upits adoption of LNG, but also pave the way for sustainable development of clean-energy solutions in the country."

To do this will require close regional cooperation among governments and businesses, he added, reiterating a call he made in September for more collaboration between the public and private sectors to realise the potential of the LNG sector in South-east Asia.

Mr Seah also said that the region can accommodate more than one LNG hub, a view increasingly shared by industry players.

"We envisage a scenario where LNG trade flows within Asia are supported by several hubs within the region," he said, adding that he was heartened by the partnership announced earlier this week between the Singapore Exchange and Tokyo Commodity Exchange.

The exchanges will work together on product initiatives such as the co-listing of LNG derivatives, creating synergies between the two market distribution networks and on promotion and development activities; they will also share their experience of developing the electricity market in their respective jurisdictions.

"With such collaboration, in the near future, Asia LNG hubs can be a key benchmark for transparent and fair LNG pricing in the region," he said.

Under the memorandum of undertanding signed among Pavilion Energy, Harley Marine, Mitsui OSK Lines and Mitsui & Co to take part in the LNG bunkering pilot, Harley Marine will build two dual-fuelled conventional bunker tankers with funding assistance from the Maritime and Port Authority of Singapore (MPA).

Pavilion Energy will supply LNG bunkers to these tankers, and the other two Japanese companies will be part of the LNG supply chain.

Pavilion Energy had earlier tied up with ExxonMobil, which owns the largest refinery in Singapore, to develop solutions for LNG bunkering and downstream developments in the country.

Separately, the International Energy Agency (IEA) warned that LNG markets - now struggling with a supply glut - are less flexible than commonly believed, which could affect global gas security. The watchdog for OECD nations said in a report released in Tokyo that its member countries have therefore tasked the group to add gas security to its mandate.

The growth in the global gas trade and diversification of supply sources bring important security benefits to consumers, but the flipside of this is that demand and supply shocks once confined to single regions could now have repercussions in more places, said IEA executive director Fatih Birol.

The IEA report noted that a growing share of LNG capacity is offline because of a lack of feedstock gas and also security and technical problems.

About 65 billion cu m of the gas - equal to the combined exports of Malaysia and Indonesia, the world's third and fifth largest gas exporters - has been affected by a doubling in the level of unusable export capacity between 2011 and 2016, said the IEA; that oil and gas prices are low could just worsen the situation. Nevertheless, as LNG contract structures become less rigid, market liquidity will be improved, which helps with gas security. About 40 per cent of LNG contracts had fixed-destination clauses last year, down from 60 per cent in 2014.

More flexible contracts will improve the ability of the global gas system to react to potential demand or supply shocks by making it easier to shift volumes from one destination to another, said the IEA.

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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

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April, 17 2019
A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

Learn more about LNG business, technology, markets and contracts
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Gas & LNG Contract Negotiations - August, 21 – 23, Kuala Lumpur
LNG Fundamentals – October, 22 – 24, Singapore

April, 15 2019