Asia's Uncertain LNG Future

The New Geography of Asian LNG

the national bureau of asian research 7 NIKOS TSAFOS is Senior Manager for the Global Gas Practice at PFC Energy, a company acquired by IHS in June 2013. He can be reached at . NOTE: The analysis in this essay draws on forecasts and data from PFC Energy, which is now an IHS company. The New Geography of Asian LNG Nikos Tsafos nbr special report #44 | november 2013 EXECUTIVE SUMMARY This essay examines Asia’s growing demand for liquefied natural gas (LNG) and explores the geoeconomic and geopolitical implications of Asia’s quest to secure sufficient LNG supplies to meet its energy needs. MAIN ARGUMENT Asia’s LNG market is being transformed by the growth in the number of buyers and sellers as well as by a wider reach that will link Asian buyers to suppliers in Australia, North America, and East Africa. The diversification of supply sources will boost Asia’s energy security but will also create new linkages requiring careful political management. Much of Asia’s new supply will come from Australia, the U.S., and Canada. In the recipient countries, foreign investment from Asian companies could create a backlash at the local and national levels; in the importing countries, dependence on the West could easily trigger insecurity and calls for openness and a level playing field. Thus, despite the undeniable energy-security benefit that will come from greater diversification, political oversight and management will be essential to sustain this system and contain the geopolitical fallout that such large-scale trade relationships often entail. POLICY IMPLICATIONS • The diversification of Asia’s LNG markets will have positive effects on energy security by creating system resilience and reducing the vulnerability of buyers and sellers to individual disruptions in the supply chain. • Despite new linkages between buyers in Asia and suppliers in Australia, North America, and East Africa, the growth in supply choice will not trigger a massive decline in prices and thus the quest to lower the import burden from energy costs will continue. • The trade relationships created by LNG will need to be carefully managed to ensure that foreign investment does not trigger a backlash in the host countries and that importing countries—in particular, China—do not feel beholden to the West. 9 THE NEW GEOGRAPHY OF ASIAN LNG u TSAFOS D emographics, economic growth, and a transition to cleaner energy will transform Asia’s energy market. By 2030, Asia’s population is expected to grow by 500 million, roughly the size of the European Union today.1 Real per capita income will increase by 90% across the region and by 32% outside China and India.2 Rising incomes will boost demand for cleaner energy. Coal is predicted to make up 45% of the fuel mix by 2030, down from 48% in 2011, and biomass will shrink from 12% to 8%. Use of nuclear energy will likely grow in China, India, and South Korea, while Japan and Taiwan will probably scale down their ambitions. In turn, natural gas’s share of the fuel mix will grow from 10% to 13%; excluding China and India, gas will provide a fifth of Asia’s energy.3 Demand for gas in Asia will thus roughly double, and this appetite will need to be met by imports from outside the region—the Middle East, Central Asia, Australia, North America, and East Africa. This new geography will create new trade flows and weaken the strategic importance of old ones, which is the inevitable byproduct of diversification. In some ways, these new flows will depoliticize energy, inasmuch as trade takes place between countries with non-energy ties. But they will also create friction as foreign investment clashes with local politics. After a decade of scarcity, Asian buyers see that gas is finally more abundant. Furthermore, Asian companies are now major investors in developing these new resources. For a region concerned about energy security, increased supply and greater control will be reassuring. Yet there are risks too. By the 2020s, Australia, Canada, and the United States could supply a third of the world’s liquefied natural gas (LNG)—a trend that could worry China. The United States, in particular, will need to resist the temptation to leverage gas for political gain. It will also need to carefully manage its relationships with Canada and Australia, whose economies will be further tied to China. Oddly, it could be Russian gas that lessens these anxieties in China...