Upstream difficulties undermine Southeast Asia’s position as a long-term LNG supplier


Strong points

Malaysia, Indonesia and Brunei account for 12% of global LNG exports

Under-investment, delays hamper new gas developments

Japanese LNG importers impacted, reviewing winter supplies

Underinvestment in the upstream sector of Southeast Asia and the continued decline of mature oil and gas fields are impacting the region’s major natural gas producers, forcing LNG exporters to scale back supplying the main customers in North Asia, more recently for cargoes in the height of winter.

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The speed at which new gas fields can be brought into service was already hampered by policies of nationalization of resources and the withdrawal of international oil majors, leaving national oil companies like Petronas in Malaysia, Pertamina in Indonesia and PTTEP in Thailand s ” take on the arduous task of maintaining energy security.

New gas production is now even more challenged by the backlash against fossil fuels, as financial institutions make it more difficult to finance exploration and production, and new gas fields are held back by the need to invest. in carbon capture and storage to compensate for the high CO2 content of the latter. assets.

“I will be the one to stand up and say that any major LNG project that wants to enter the design phase today has to come with carbon capture,” Siddhartha Shrivastava, head of energy and resources for the ‘Asia at Sumitomo Mitsui Banking Corp. ., said at S&P Global Platts Asia LNG & Hydrogen conference in October.

Such problems hamper Southeast Asia’s ability to meet Asia’s LNG demand and its own domestic gas needs, while increasing the dependence of large gas-dependent economies like China, the United States. Japan and South Korea vis-à-vis long-haul suppliers such as the United States and Atlantic Basin LNG exporters. Supply shortages during peak winter demand periods have contributed to an energy crisis and record gas prices.

Malaysia, Indonesia and Brunei account for around 12% of global LNG exports and nearly a third of LNG produced in Asia-Pacific, second only to Australia. Papua New Guinea is the region’s other major LNG exporter. In comparison, Southeast Asia’s combined proven gas reserves, including non-LNG exporting countries like Myanmar and Vietnam, are larger than Australia’s, leaving great export potential. of untapped energy.

Customer impact

Until 2017, Japan was the main destination for Southeast Asia’s LNG exports, but China has rapidly increased its share in recent years and is expected to become the region’s largest customer by the end. from 2021.

However, Southeast Asia collectively remains Japan’s second-largest LNG supplier after Australia, and Japanese utilities typically import more LNG from Malaysia each year than Qatar, the world’s largest LNG exporter.

Japanese importers, who have futures contracts with the state-owned oil company Petronas, have received notices of cancellation and postponement of LNG shipments scheduled for winter, and discussions are still ongoing over the extent of the tolerances. downward quantities or DQTs, which are supply reductions that can be legally accommodated in sales and purchase contracts.

“[The] The reported DQT is part of the contract which is usually negotiated and agreed upon with customers. We are negotiating this and there will be a new schedule and rescheduling of deliveries to be agreed with customers, ”Petronas President and CEO Tengku Muhammad Taufik recently said at the ADIPEC conference in Abu Dhabi. He did not answer further questions. .

But supply issues have already prompted Japanese importers to review their winter purchases and consider contingency plans. This includes assessing the need for spot LNG shipments, researching alternative suppliers, and reviewing shipping schedules for the winter, with at least one Malaysian LNG importer reporting that spot LNG purchases from current price levels would be a last resort.

Japanese importers have also expressed disappointment with Petronas’ sales of spot LNG cargoes from the floating LNG facility in Malaysia and Gladstone in Australia as it makes supply cuts for customers under contract.

S&P Global Platts data shows several spot sales of LNG by Petronas for loading from Australia and its FLNG in Malaysia in November and December, at relatively high prices of over $ 30 / MMBtu. Petronas has no obligation to divert cash shipments to its futures customers, but traders said it was not unusual for producers to optimize their portfolios to maintain trading relationships.

Despite Malaysia’s LNG supply problems, Japan should have guaranteed sufficient LNG stocks for this winter, unless the country experiences severe cold snaps, said a market source who is monitoring the situation. Malaysia. LNG stocks stood at 2.07 million tonnes at the end of October, remaining above the highest level in the past five years, but down from 2.46 million tonnes at the end of September, documents show government.

Long-term dependency

The decline in production from Southeast Asia could prompt a more strategic assessment of the long-term dependence of its Asian customers, particularly with competing supply emerging from Australian brownfields to the Russian Arctic.

This reassessment could easily fuel future negotiations when contracts expire, both for suppliers and for Japan. The recent decision by the country’s largest utility, JERA, to increase the stake in US-based Freeport LNG is an example of a strategic realignment of supply.

“Platts Analytics calculates that Petronas has around 6 million t / year of contracts slated to expire by the end of 2025, many of which are likely to face some form of renegotiation in the coming years,” Jeff Moore, director, Asian LNG Analytics at S&P Global Platts, said.

“Several of these contracts were signed as extensions of the original contracts that underpin the liquefaction trains at Bintulu. During their last re-signings, they were often extended several years before the contract expired, showing how current supply issues could put some of those re-signings at risk, ”said Moore.


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