OXFORD INSTITUTE FOR ENERGY STUDIESNATURAL GAS IN ASIA: The
Challenges of Growth in China,India, Japan and Korea
Professor Jonathan Stern
Director of Gas Research
Oxford Institute for Energy Studies
Institute of Energy Economics, JapanTokyo, July 11, 2008
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OXFORD INSTITUTE FOR ENERGY STUDIESOIES* Natural Gas Research Programme
WHO WE ARE: a gas research programme at an independent
academic institute, part of Oxford University, specialising infossil fuel research
WHO WE ARE NOT:z consultantsz sellers of exclusive, high price business reports

WHAT WE PRODUCE: independent research on national andinternational gas issues
HOW WE ARE FUNDED: three-year sponsorship by companies
and governments in gas producing and consuming countries

Information about our Institute, our Programme andits publications can be found on our website:
http://www.oxfordenergy.org/gasprog.shtml*Oxford Institute for Energy Studies is an educational charity

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Examples of Published Research
Natural Gas Demand in Europe – the importanceof power generation, Anouk Honore
z The New Security Environment for European Gas,
Jonathan Sternz US Natural Gas Prices: scenarios to 2015,
Michelle Fossz Gas-OPEC: a distraction from important issues ofRussian gas supply to Europe, Jonathan Sternz The Potential Contribution of Natural Gas toSustainable Development in South Eastern
Europe, Aleksandar Kovacevic
z Is there a rationale for the continuing link to oil
product prices in Continental European gas
contracts? Jonathan Sternz Ukraine’s Gas Sector, Simon Pirani
z The Dolphin Gas Project, Justin Darginz Regulatory models and economic performancesin the European gas market: A quantitative
analysis, Nadine Haase

OXFORD INSTITUTE FOR ENERGY STUDIESz

Free downloads from www.oxfordenergy.org

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OXFORD INSTITUTE FOR ENERGY STUDIES

Research in Progresszzzzzzzzzz

CIS Gas Markets and Their Impact On Europe, ed. SimonPirani
European Gas Demand, Supply & Pricing: cycles, seasonsand the impact of LNG price arbitrage, Anouk Honore
A History of UK Gas Trading, Patrick Heather
The Independent Gas Sector in Russia, James Henderson
Gas and Power in Spain and Italy, Anouk Honore
German Gas Liberalisation: a post-2006 assessment, HeikoLohmann
New LNG Projects: what do IOCs have to offer? DavidLedesma
Is There any Need for Long Term Planning in the British GasMarket? John Elkins
The Influence of Gas Storage on Gas Price Volatility, MarkusWachterIs there a rationale for the continuing link to oil productprices in Continental European gas contracts, 2nd Edition,Jonathan Stern
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas in Asia:
OIES Presenters
Introduction: Jonathan Stern
THE MARKETS
China: Dr Keun Wook Paik
Korea: Dr Keun Wook Paik
India: Jonathan Stern
THE SUPPLIERS:
Middle East: Andy Flower
South East Asia/Australia: Andy Flower
Russia and Central Asia: Jonathan Stern
Conclusions: Jonathan Stern
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OXFORD INSTITUTE FOR ENERGY STUDIESIntroduction: Natural Gas in Asia

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What Questions Are We Seeking to Answer?
z Will natural gas assume a share in theenergy balances of China, India, Japan andKorea by 2020 equivalent to other OECD
countries around 20%?
z If not why not?
z What has changed in our perceptions ofnatural gas futures in these countries overthe past 5 years?
I will return to these questions in thepresentation of the conclusions
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Changed Context for Asian gas in 2008
Compared with 2002z GDP growth 6-10%pa; rising energy

demandz much higher energy/gas prices and projectcosts
z Emergence of China and India ascompetitors in Pacific/global LNG markets
z Tightness of LNG supply/demand with very
high spot prices
z Heightened concern about security ofsupply, meaning availability of sufficient
gas/LNG to meet anticipated demand
Liberalisation has faded from the agenda,
but supply competition has increased

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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas in China

9OXFORD INSTITUTE FOR ENERGY STUDIESStructure of Chinese Gas Demand to 2020

Source: Fridley in Stern 2008

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Source : Jonathan Stern, ed, Gas in Asia (OIES, 2008)

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Gas Pipeline Development
In 2005, total pipeline 22,451 km, with 37.4 bcm/ycapacity
1997, 1st Shaanxi-Beijing Pipeline, 3.6 bcm/y
2004, Chongqing-Wuhan Pipeline, 3.0 bcm/y, 780km
2004, West-East Pipeline, 12.0 (17.0) bcm/y, 4,000km
2005, Jingbian-Xian Pipeline, 2.5 bcm/y
2005, 2nd Shaanxi-Beijing Pipeline, 12.0 bcm, 780km.
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Summary and Conclusions• China’s gas expansion is set to continue. But
domestic reserves are not big enough and massive
imports inevitable. By 2020, around 200 bcm gas
demand is very realistic and around 80 bcm of gas
has to be covered by LNG or pipeline gas.
• The role of gas for power is compromised by theprice burden, and China is set to increase thedependence on coal use for power generation.
• The second gas pipeline will play an important rolefor China’s gas expansion but the third gas pipeline
is subject to the price negotiation between Russiaand China.
• The delay of pipeline gas from Russia to China willforce China’s heavy dependence on LNG import andthe consequence will be more competition forfinding LNG supply sources.
• Gas in China’s energy balance by 2020 is unlikelyto reach to 10%.
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OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas in Korea

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Pipelines and Regas Terminals in Korea

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OXFORD INSTITUTE FOR ENERGY STUDIESSummary and Conclusions• Korea’s gas expansion is set to slow down.
• Main trunk pipeline development is virtually completed but
the storage build-up still requires a massive investment.
• Korea’s gas supply and demand gap in 2011, 2015 and 2020is projected to be 6-8 mt, 11-12 mt, and 22 mt respectively,
based on the contracted volume.
• Korea had to pay a huge price for the delay of Russian gas
supply to Korea by pipeline. The chance of Russian pipeline
gas supply to the Korean Peninsula before 2018 is very slim.
The same applies to Sakhalin 3 LNG.
• The most effective way to narrow the supply-demand gap is
Korea’s active participation in the upstream gas sector. A newentity Korea National Oil and Gas Corp (KNOGC), which is aholdings company of KNOC and Kogas will help the upstream
opportunity development.
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OXFORD INSTITUTE FOR ENERGY STUDIESIndia

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Fundamental Issues facing gas buyers
in Asia
From Turkmenistanzz

From Iran

From Myanmarzz

Source: Natural Gas in Asia, OIES, 2nd Edition, May 2008

Gas import pipelines
all have issues
Gas transportation
system is dominatedby GAIL, skewed tothe states in West andSouth (East rich incoal)
New gas finds in theEast means thepipeline network willdouble 2008-12
LNG imports 11 Bcma
(2007), expected torise to 20 Bcm by 201518

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Conclusionsz

Growth of the gas sector is linked to:Pace of reform in the power sector, power shortages
will drive changez Continuation of gas subsidies to the fertiliser sectorzzIncreased domestic gas supply will result inlower LNG imports due to price competitionz Reduced reliance on developing transnational gaspipelinesz Development of new markets and drive rather thanfollow reformzzImpact of higher oil/LNG prices may be toencourage domestic coal use
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Middle East

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Middle East – LNG and Pipeline Infrastructure

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30%
25%
20%
15%10%5%0%

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

OXFORD INSTITUTE FOR ENERGY STUDIES

Middle East Share of Global LNG Production
1990-2007
1990-2007

Source: Author’s Estimates and Cedigaz
22ActualExpected

12010080604020

Abu Dhabi
Qatar - Under Construction 2008
Yemen - Under Construction 2008

20202018201620
1420
1220102008

2006

2004

2002

02000

in Bcm/a

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Middle Eastern LNG Production from Projects
in Operation and Under Construction

Qatar - In Operation 2008
Oman
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200

150

10050In Operation
Additional Production
Speculative Production

19201720152013201120092007020in Bcm/a

OXFORD INSTITUTE FOR ENERGY STUDIES

Possible Middle Eastern LNG Production
2007-2020
2007-2020

Under Construction
Possible Iranian Production
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OXFORD INSTITUTE FOR ENERGY STUDIESSouth East Asia andAustralia

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OXFORD INSTITUTE FOR ENERGY STUDIESDiverse region with existing and new LNG
supply, limited pipeline linkages. New gas
supply through LNG not pipeline

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Drivers of Asian LNG Supply
Energy Policy
Frameworksz Resourceavailability
z Plant construction
costs
z Atlantic Basin LNGdemandz Gas Prices
z Out of region
supplyz

Drivers of Energy Policy

Source: Natural Gas in Asia, OIES, 2nd Edition, May 2008

• Will Asian gas supply countries keep gas fordomestic use vs. export?
• Can new LNG be developed at economic levels?

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Australian LNG, Key to S.E. Asia LNG Growth
2007 exports 21 Bcm
and expected to rise tonearly 100 Bcm by 2017z New projects could bedeveloped slower:zShortage of humanresourcesz Technicalconsiderations (highCO2)
z Environmental factors
zSource: Natural Gas in Asia, OIES, 2nd Edition, May 2008

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S.E. Asia LNG Supply is expected to rise to200 BCM by 2020

Source: Natural Gas in Asia, OIES, 2nd Edition, May 2008

• 2007 S.E. Asia LNG supply 100 BCM– all stayed in the region• Can additional regional supply be delivered ?

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Russia and Central Asia

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Russian Gas Exports to Asia: internal
2002-08
Russian politics 2002-08z Russian government gave Gazprom overallresponsibility for coordination of all projects
in eastern Russia BUT Gazprom was not
involved in any of these projects
z This changed with Gazprom majority stakein both Sakhalin 2 and Kovykta
z Eastern Gas Programme shifts emphasis
to domestic gas/economic development
Russian government determination to“reclaim” assets from foreign companies andestablish Gazprom as a national champion
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2006-08
Russia – China Gas Exports 2006-08
March 2006 Meeting between the presidents;– MOU covering:z Altai (Western) Pipeline: from westernSiberia (Bolshekhetskaya + Krasnoyarsk)
linking with West-East Pipelinez Eastern Pipeline taking gas from:Kovykta – Rusia Petroleumz Sakha region - Chayandinskoye – Gazprom(Rosneft?) Sakhaneftegazz Sakhalin (Gazprom opposes ExxonMobil’s
2004 contract with CNPC)z

Gazprom’s September 2007 Eastern Gas
Programme eliminates Kovykta as asource of exports – no progress

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Eastern Gas Programme: export infrastructure

Stalled Gazprom-CNPC negotiations meansno pipeline gas exports before late 2010s33OXFORD INSTITUTE FOR ENERGY STUDIES

Russian Gas Exports to Asia: summaryz Kovykta:
zexports ruled out by Gazprom; local use andpossible UGSS linkz Chayanda:

transferred to Gazprom ownership in May2008
z plan to start production at the field by 2016
for local use; possible exports thereafterzz Sakhalin:

1: big fight with Exxon-Mobil continuesz 2: LNG deliveries to start early 2009z 3: (part) transferred to Gazprom ownershipin May 2008; could be used for LNG or PNG
zNo sense of urgency on Gazprom’s part34OXFORD INSTITUTE FOR ENERGY STUDIES

Central Asian Pipelines to China
KAZAKHSTAN:
z Feasibility study for a gas pipeline parallelto the oil pipeline is under way
TURKMENISTAN:z April 2006 Agreement between President
Niyazov and Premier Hu Jintao
z 30/year Bcm to be purchased for 30 years
starting in 2009(?)
z Prices will be a “comparable, internationalmarket price”
1000-2000k to the Chinese border, let alone
from the border to markets; cost will beconsiderable – construction has started 35

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Russia and Central Asia: conclusions
CONTRARY TO EXPECTATIONS OF 2000-06:
z Central Asian pipeline gas to China willcommence in the next 2-3 years
z No Russian pipeline gas projects to China,Korea or Japan look likely before 2020
z Altai pipeline can only be realised with a
3rd West-East Pipelinez Pipeline gas from Chayanda or Sakhalin 3
to either China or Korea is still possible
before 2020 but would need much greaterurgency from Moscow
LNG exports – Sakhalin 2 expansion –currently more likely than pipeline exports
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OXFORD INSTITUTE FOR ENERGY STUDIESConclusions: gas in Asia up to2020: what are the challenges ofgrowth?

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OXFORD INSTITUTE FOR ENERGY STUDIESASIAN GAS DEMAND ((Bcm)
Bcm)

2007

2020 proj

Demand%PED*

Demand%PED*Japan

90.2

15.7

101-116

18-20

Korea

37.0

14.2

50-55

16-17

China

67.3

3.3

200

7-8

India

40.2

9.0

82

10-12

TOTAL

234.7

*primary energy demand433-453
Source: Stern 2008

• Demand nearly doubles by 2020 but share ofprimary energy demand increases moderately• Gas has little impact on coal use or CO2emissions in China or India38OXFORD INSTITUTE FOR ENERGY STUDIESASIAN GAS IMPORTS ((Bcm)
Bcm)

2007

2020 proj

Pipeline

LNG

Pipeline

LNGJapan

088.8

0100-115

Korea
China

0034.43.903050-55
50-100India

010.0020

TOTAL

0137.130

220-290
Source: Stern 2008

• Asian LNG Imports will double by 2020.
• China could become as big an importer asJapan and is the major new Pacific market.

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Asia Remains Largely an LNG Marketz ASEAN has successful pipeline trade butwith limited growth potentialz Russian pipelines to China, Korea andJapan – despite ample commercial
justification – have made no substantialprogressz Pipelines from Turkmenistan and Iran toIndia (and elsewhere in Asia) are unlikely
to make much immediate progress
z The only pipeline connection definitely
going ahead is Turkmenistan/Kazakhstan
to China; Myanmar-China is also likely
Reasons for lack of success are largely
political – for international and internal(price) reasons – there is still time toachieve results before 2020 (but not much)

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OXFORD INSTITUTE FOR ENERGY STUDIESChallenges to Growth: supply
From where will Asia source its large scale
additional* gas supplies:z Australia, Russia – Sakhalin and Chayanda(Kovykta?)z Will there be additional supplies from: Iran,Qatar, Indonesia?
z Can long distance international pipelines,
especially from Russia, be implemented
prior to 2020? And if not….
z Is the future of gas in Asia increasing
competition for limited supplies of LNG:
between Asia-Pacific buyers, between
Pacific and Atlantic buyers?
*ie additional to already signed contracts

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Answers to Questions
Q1: Will natural gas assume a greater share in theenergy balances of China, India, Japan and Korea
by 2020 equivalent to other OECD countries
around 20%?
A1: No, but Japan will come close
Q2: If not why not?
A2: Principally due to lack of pipeline development,
both domestically and internationally
Q3: What has changed in our perceptions of natural
gas futures in these countries over the past 5years?
A3: Changes in general economic and energy priceoutlook can fundamentally change the current andfuture perceptions about gas; even five years is along time to look ahead!
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