The Asia-Pacific Region: A market niche for Russia’s

LNG, and price change drivers

Anastasiya Masalkova

Senior Lecturer Department of Economy Theory,Gubkin Russian State University

of Oil and GasItaly, Rome, June 12th 2015

• RUSSIAN LNG PROJECTS

• LNG pricing

• APR’s gas market

• A market niche for Russia’s LNG in APR

Focus and Overview of Key Topics

Russian LNG projects

LNG Vectors at present…..

…and LNG Vectors in the Future

LNG exports reflect «managed competition»

between the new oligopoly in Russian gas sector

Export sales based around LNG and piped gas

LNG Pricing

LNG-Commercial Interactions Between East and

West

Oil-linked Pricing Dominant in Core Markets

Pricing of LNG example

Data: http://www.capp.ca

Does the drop in Asian LNG spot prices reflect a lack of LNG demand growth or the low oil

price environment

The declining oil prices has capped LNG spot prices through oil switching, but the Asian

LNG market has been weakening

APR’s gas market

The Asia-Pacific Region (APR)

16

APR: countries of South, East and South-East Asia and Oceania

APR’s gas market: Facts

� The fastest growing demand for gas: over 5% per

year (the average global rate being 2.2%)

� Gas share in the energy balance: 11% (the average

share worldwide being 25%)

� The largest LNG market by volume:

� The region consumes up to 70% of the global LNG

imports

� The APR accounts for 30% of LNG production

� 80% - the percentage of LNG in the imports

� Potential growth by 200% up to 2035.

17

Breakdown of gas consumption in the APR, 2012:

625 billion cub.m

18

Others

12%

China

24%

India

9%

Indonesia

6%

Japan

19%

Malaysia

6%

Pakistan

7%

South

Korea

8%

Thailand

9%

Share of gas consumption:

625 billion cub.m

8,2%

9,9%10,3%

8,8%

5,6%

7,8%

9,6%10,6%

Gas consumption growth rates (the region’s

average being 5.0%)

A market niche for Russia’s LNG in APR

Forecasted production and

consumption in the core markets

600,0

800,0

1000,0

1200,0

1400,0

2015 2020 2025 2030 2035

Forecasted gas consumption

by key regions, billions of

m3/year

North America

Europe & Eurasia

Asia Pacific

North

America

Europe &

Eurasia

Asia Pacific

1038

12451274

11721251

827

Gas production and

consumption in 2035

Consumption Production

Source: BP Energy Outlook 2035

The present and future of APR’s gas market

Producti

on; 470

Imports;

155

2012Total consumption:

625 billion m3Growth by 200%

or 9% per year

Source: BP 2013, Roberto F. Aguilera et al, The Asia Pacific natural gas market: Large enough for all? . Energy Policy, 2014.

Production

827

Imports;

447

2035Total consumption:

1,274 billion m3

APR’s requirement of gas imports

•

PNG

22%

LNG

78%

Imports by 2035: 447 billion m3,

including:

� LNG – 337 billion m3 (248 million t. LNG)

� PNG – 110 billion m3

2015 2020 2025 2030 2035

62

37

94 98

29

Additional requirement for

imports from 2012 to 2035,

billions of m3

Meeting the demand for LNG up to 2035, M tons/year1.Russian LNG supply projects

2,65

10

0

10

20

2018

Ямал СПГВладивосток СПГПечора СПГ

17,6

73,5

65,5

2014

2. Contracted LNG in

APR by 2014

Китай Япония и Корея

139

2015 2020 20252030

2035

49

30

6049

30

75 78

23

Meeting the additional requirement

for LNG imports

Contracted LNG Demand for LNG

Niche: 15 M tons/year

Current level of LNG prices

The Asia-Pacific Region:

Pricing in the APR: Facts• The LNG market in the region follows the pattern of

Japanese LNG contracts:o The principle of Market Value Pricing: The LNG price is linked to the crude

oil price as its key substitute in the target consumption sector (Japan) –

power generation

• Key price indices:o JCC - Japanese Crude Cocktail

o ICP – Indonesian Crude Oil Price

• Key price index formulas:o Linear

o S-curve

• Prior to the 2000s, the LNG price was linked to the

Asian Premium – crude oil price with a premium.

25

APR’s gas prices are higher than in the core markets

0

100

200

300

400

500

600

70019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$/1,

000m

3

APR (Japan)

Europe

Europe (UK)

USA

APR

Europe

Europe (UK)

USA

Correlation between the price level and the indexation form

0

2

4

6

8

10

12

14

16

18

20

17 15 19 12 26 24 34 62 94 78 109

Correlation between LNG and

crude oil prices in the APR

Цена нефти марки Dubai

Цена СПГ в Японии

$/MMBtu

$/bbl

Year

CIF

prices,

$/1000m

3

Dubai

crude,

$/bbl

2000 173 262001 170 23

2002 156 242003 175 27

2004 190 34

2005 221 492006 261 62

2007 283 682008 459 94

2009 332 612010 399 78

2011 539 1062012 613 109

Correlation between the price level and the indexation form

0

1

2

3

4

5

6

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

$/M

MB

tu

LNG price Crude Oil price

Linear formula

$/bbl

0

1

2

3

4

5

6

8 9 1011121314151617181920212223242526272829

$/M

MB

tu

S-curve

Crude oil Parity S-curve$/bbl

0

2

4

6

8

10

12

14

16

18

20

17 15 19 12 26 24 34 62 94 78 109

Correlation between LNG and

crude oil prices in the APR

Цена нефти марки Dubai

Цена СПГ в Японии

$/MMBtu

$/bbl

LNG price level by the end of 2013

29

China

LNG

Japan

LNG

S. Korea

LNG

Indian

LNG

Japan/Ko

rea

Marker

(JKM)

(Spot)

Oil price

parity at

100$/ bbl

$/MMBtu 15,25 15,65 15,65 13,75 17,348 17,24

$/1000m3 558 573 573 503 635 631

0

100

200

300

400

500

600

700

0

2

4

6

8

10

12

14

16

18

20$/

MM

Btu

$/1000m3

Data: Federal Energy Commission USA, Plats

Drivers of the LNG price change in APR

Asia-Pacific Region

1. Exchange trading started in the APRMay 2013: The LNG Hub opens in Singapore

• SLNG (Singapore LNG Terminal) capacity: 3.5 Mtpa(two-week gas consumption in Japan), with an option to expand up to 9.0 Mtpa and more.

Prospects of LNG exchange trade in Singapore:

• Criticism: lack of volumes for gas (LNG) trading - low market liquidity.

• Facts:1. Japanese, US, Australian, Indian and European companies are getting

ready for participation in LNG trading: the traders are hired, the

volumes are allocated.

2. The lack of APR market niche for Russian gas before 2025 opens an

opportunity for short-term deals with Russian LNG at the Singapore

Exchange.

How will exchange trading

influence the regional price level?Initially, the low liquidity will inhibit full-scale LNG trading.

The Singapore Hub will not be the main point for LNG trade but:

• It will turn into a supply balancing tool

• Price in hub will become an alternative price indicator (for oil baskets like JCC)

• It will contribute to a change in the regional price level

• Subsequently, it will result in pricing transformation in APR: migration from crude oil indexation to exchange pricing.

2. Prospects of methane hydrate

production and its impact on LNG price

• Japan: Research of commercial production potential of natural gas hydrate (NGH) and subsequent power generation using marine plants by 2018.

Implications of NGH commercial production launch in Japan:

• Increase in electricity supply → reduction in electricity prices → MH competing with LNG via electricity price → LNG prices revised downward.

• Dissemination of production technologies to neighboring countries (China, Korea) → LNG price revision linked to the electricity or MH cost.

Prospects of Russian gas exports to

the APR• There is a potential for increased LNG supplies

from Russia to APR countries but:

• A flexible marketing strategy is required:o Long-term contracts combined with participation in exchange

trade.

o Pricing mechanisms for LNG contracts ensuring thecompetitiveness of prices for Russian gas in the buyer’s end market, including:

• Crude oil price indexation, with downward revision (≈-10%)

• Use of exchange price indicator• Hybrid model: exchange prices + crude oil price indexation:

(30%/70%, 40%/60% etc.)

• Netback (or indexation) based on electricity and other prices.

34

References:

1. IGU World LNG Report – 2014.2. Exxon Mobil 2014.3. BP Statistics 2013-4.4. SHWE Gas Movement.5. IHS CERA, various sources.6. BP Energy Outlook 2014.7. Eriras.ru.8. Argusmedia.com.

Anastasiya MasalkovaPhD

Senior Lecturer Department of Economy Theory,Gubkin Russian State University

of Oil and Gas, Leninsky prospect, 65-1, 119991,

Moscow, Russiamasalkova.a@gubkin.ru

Thank you for your attention!