Q: Hi Liutong, thanks for chatting with us. So, tell us a bit about WaterRock Energy Economics and your role as Director.

A: In WaterRock Energy Economics, we focus on providing robust and independent analysis on the gas and renewables sector in Asia using rigorous economic frameworks. As a director, I have been leading multiple interesting and high-stake consulting projects in ASEAN and greater China region, including a regulatory projects related to regulatory and policy changes of competitive electricity markets in Asia, market and strategy studies on investment opportunities and risks in the gas and renewables sector in mainland China, Taiwan, Singapore and the Philippines.

Q: You have written previously about the issues in China from banning domestic coal use and the struggles in LNG infrastructure. Has there been improvements in the infrastructure for LNG consumption in China, and what are the challenges still faced in this progression?

A: There was a gas shortage during winter in 2017 in mainland China, mainly because of the much faster than expected coal-to-gas switching and the lack of gas storage facilities to manage the winter gas demand spike in North China. In 2018, the Chinese National Oil Companies (NOCs) had much better preparation, and the winter was also much milder than expected. Thus, there was no shortage except a few days’ gas demand rationing due to supply disruption of gas imports from Central Asia in 2018.

One of the fundamental causes is related to the bottleneck on gas infrastructure due to the lack of gas storage facilities for managing gas demand seasonality, the lack of interconnection among the transmission pipelines owned by different state-owned companies and the lack of distribution gas lines at provincial and city level.

In the past 2 years, gas infrastructure built-up (i.e. LNG terminal, gas storage and pipelines) have been only at modest pace, partly because of the regulatory uncertainty related to the creation of a national pipeline company. It remains unclear what the national pipeline company will own and what regulation will be imposed on it. It is expected that the national pipeline company will be formally set up before the heating month this year, and the detailed regulation and policies on the regulation will be finalized in the coming years. After that, the pace of pipeline and storage facility expansion may be more coordinated and faster if the whole regulatory change is implemented well. Furthermore, private and foreign investors may be more willing to invest in gas infrastructure facilities if “open and fair” pipeline access regime is truly implemented after the creation of the national pipeline company.

Q: What are your views on the growth of small-scale LNG in Asia?

A: This is a very interesting but challenging topic. Up to now, the development of small-scale LNG in Asia has been much slower than anticipated 5 or 10 years ago. There have been some small-scale LNG activities in China, mainly driven by the provincial gas price differences within China and the difficulty of accessing gas pipelines owned by the Chinese National Companies. In other parts of Asia, there have been lots of discussion and drawing of nice small-scale LNG schematic diagram, but no real commercial projects. This is partly because of the difficulty of getting the long logistical arrangement of small scale LNG to work economically, especially as crude oil prices have been much lower than the level in 2011-2013. Furthermore, many Asian countries have regulated energy prices, and power generators can directly pass fuel cost to end-users. These regulations reduce the incentives for private investors to proactively push for small scale LNG solution even when it is cheaper than the alternative fuels (such as diesel).

We believe the same logistical and regulatory barriers will continue and oil prices will likely remain weak in the coming years, so we are relatively pessimistic about the growth of small-scale LNG in Asia.

Q: What is the outlook for the further usage of LNG in Asia?

A: This is a very broad question. We do have an optimistic view on future LNG demand in Asia. We expect the Asian economy will continue to grow healthily, which will drive energy demand growth. As many Asian countries start to prefer an energy mix that is more environmentally sustainable, they have reduced the role of coal and increase the role of gas/LNG in their future energy mix. This will likely drive the demand growth of gas in Asia. Furthermore, in quite a few Asian countries (like Thailand, the Philippines and Bangladesh), domestic gas production is expected to decline in the coming years because of the depletion of domestic gas reserves. Thus, LNG will be needed to not only meet the gas demand growth but to replace the declining domestic gas production in some Asian countries.

Nonetheless, many new LNG buyers in Asia (like Vietnam, Philippines, Bangladesh etc) will be likely quite price sensitive as they will be keen to ensure the increasing gas penetration in the country do not push up their gas and power tariff too much. If LNG price is too high, they may switch back to coal. In addition, LNG will be also predominantly used in the power sector, and new LNG-fired CCGT plants is most economical for mid-merit and peaking application. This means that they will highly value flexibility in their LNG contractual terms.

If LNG suppliers could provide reasonable LNG price with flexible terms, the potential LNG demand growth in Asia could be at high single digit for most Asian countries.