Structurally cheaper LNG should displace coal from Japan, and broader Asia
The collapse in the spot price of liquefied natural gas (LNG) in Asia is a short-term phenomenon that may well end up having a longer-term impact, especially on thermal coal.
The spot price dropped to $2.95 per million British thermal units (mmBtu) for the week ended Feb. 7, the lowest price in records stretching back to 2010.
It has lost 57% of its value since the pre-winter peak of $6.80 per mmBtu in mid-October, and is down 74% from the peak price in 2018 and 86% from the all-time high from February 2014.
The reasons for the slumping price are well understood, with both demand and supply factors playing a role.
On the demand side, growth in China has slowed from its breakneck pace as the world’s second-biggest buyer of LNG works to build the infrastructure needed for more coal-to-gas switching in both residential heating and industry.
LNG demand in Japan, the world’s top buyer of the super-chilled fuel, has also been sluggish amid a warmer than usual winter and the restart of some of its nuclear fleet, idled after the 2011 Fukushima disaster.
On the supply side, the commissioning of several new projects in Australia, which has overtaken Qatar as the top LNG exporter, as well as in the United States, has led to an abundance of cargoes.
While it’s unlikely that spot LNG prices will stay at the current depressed levels indefinitely, the trend toward structurally lower prices appears sustainable.
There is still no shortage of LNG projects being built, with 17 million tonnes of capacity due to be commissioned this year alone, and considerably more likely in the next five years, as projects from Russia to East Africa start to come on line.
This supply surge is likely to have two impacts on prices.
Firstly it will ensure that spot prices remain under downward pressure, and secondly, it will likely accelerate the shift away from long-term, oil-linked contracts to shorter-term, more flexibly priced deals.
This change in the way LNG is priced should give pause for considerable thought to any would-be developers of thermal coal power projects based on imported fuel in Asia, especially Japan.
JAPAN’S COAL PLANS
Japan faces considerable criticism and scrutiny of its plans to continue building new coal-fired power plants, rather than speeding a shift to renewables, or even gas-fired units.
While Japan’s energy policy calls for increased renewables, it still envisages about a quarter of generation capacity being supplied by coal by 2030.
It has 9.3 gigawatts (GW) of coal-fired capacity under construction, although much of this will be replacements for ageing units in the current fleet, which has a capacity of 46.9 GW.
As a country that relies on imports for virtually all its energy, Japan has long prioritized security of supply and diversity in its energy mix.
But perhaps the sands have shifted enough to lead to a re-think.
It would in all likelihood be possible to sign long-term or medium-term LNG supply pacts that are not linked to the price of crude oil, but rather to other instruments such as U.S. Henry Hub natural gas, or European gas prices, or even seaborne thermal coal costs.
This could give Japan the security of supply it desires, but virtually eliminate the problem LNG has always had, its high cost relative to thermal coal.
Thermal coal prices have, similar to LNG, lost ground recently, but not to the same extent, with the Argus Newcastle index dropping to $64.18 a tonne in the week to Feb. 7, down 7.8% from its mid-Jan. winter peak of $69.59.
In the past LNG was supplied by a small number of countries, meaning there was geographic and geopolitical risk in becoming too dependent on the fuel.
This is no longer the case, with numerous new entrants to the LNG market, and more on the way.
Thermal coal is now the concentrated market, with seaborne supplies dominated by Australia and Indonesia, and only relatively small volumes available from second-tier exporters such as Colombia, South Africa and the United States.
With Indonesia aiming to reserve more coal for its domestic market, and environmental pressure cramping new and existing projects in Australia, seaborne coal looks more risky from a long-term supply security perspective than either LNG, or renewables, such as solar and wind, backed by battery storage.
Throw in coal’s difficulties in winning social license, securing capital and insurance and it’s increasingly challenging to see why any Asian nation seeking to boost electricity generating capacity would build coal-fired power, unless it had domestic reserves.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Editing by Clarence Fernandez
GasPro 2.0: A Webcast Symposium
Following the successful GasPro Webcast Symposium in October 2019, the third GasPro Webcast Symposium will take place on October 21, 2020.
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October 21, 2020 08:30 AM CDT