Asia takes foot off the gas

Asian countries have been expanding their use of natural gas and LNG in power generation, but industry experts are now predicting that coal is set to remain the region’s dominant fuel.

By Nigel Blackaby

Fuel choice decisions in the power industry tend not to be short term. Infrastructure has to be put in place and lengthy contracts entered into if security of fuel supply is to be achieved. Across Asian power markets, the trend over recent years has been to increase reliance on gas, which in many countries has meant planning for the import of LNG. In Hong Kong, major utility China Light and Power (CLP) is pressing ahead with securing consents for a new LNG receiving terminal to serve its Black Point power station. Hong Kong imports all its fuel and has adopted a policy to encourage the use of gas in power generation in order to diversify its security of supply and improve air quality.

Until recently, increasing reliance on gas had seemed by many in the region to be the obvious choice for future fuel security, given the extent of supplies in the region and the fact that by burning more gas and less oil and coal, environmental goals could more easily be met. What is making planners and power utilities rethink this strategy in Asia is the sharp increase in gas prices, to a large extent brought about by the higher cost of crude oil, to which pricing is closely linked. The increasing globalization of LNG trade, combined with more spot trade, is increasing the linkage to crude market pricing. Where pipeline gas prices are linked to crude there have been substantial rises. In Thailand and Singapore this has affected 70-80 per cent of each countries generating capacity.

Gas is currently a sellers market, but for some the higher prices that are being demanded are less of a concern. China’s Guangdong Province took the decision to rely largely on gas but was able to negotiate highly competitive long-term contracts. In June this year, Guangdong brought its first LNG facility on stream and a second is planned. However, the Province now looks like being the exception, with China stalling or cancelling the construction of many of its planned LNG regasification plants and LNG-based power plant projects.

ICF International’s East Asia fuel consumption projection
Click here to enlarge image

“Despite there being a recent moderation in LNG spot prices, oil and LNG pricing is expected to remain high,” Chris Bowden from energy analysts IHS Inc. told delegates at the recent POWER-GEN Asia conference. “This is influencing the Chinese government to develop its domestic gas supplies by increasing exploration and by building more gas pipelines. China is also pursuing more renewable and nuclear power projects.” In India, a number of planned gas fired power projects have been cancelled. Bowden points out that, with the influence of environmental issues being less marked in Asia’s developing countries, development of future gas fired power generation will be very sensitive to gas prices.

The spike in gas prices on the back of booming world oil prices is a reminder of the volatile and cyclical nature of gas supplies, where market pricing can be driven not only by supply availability but also by world events. Most analysts predict a continuation of high oil prices for the next few years and as a result, gas and LNG prices are likely to remain firm. Bowden however, points out that some of the predictions of high gas prices fail to take into account the many recent new gas field discoveries in the region. His advice to independent power producers is to wait for the cyclical downturn before signing any long-term fuel contracts.

What this means is that coal is once again enjoying a competitive advantage. The fuel source is currently far cheaper than other hydrocarbon fuels and its relatively steady and low price is causing many countries to re-think plans to focus power generation on more expensive hydrocarbons. Coal enjoys the advantage of being in plentiful supply and reserves are much more evenly distributed around the world than both oil and gas. China, Australia, Indonesia and India all have large coal reserves, yet remain dependent on oil imports. “Coal supplies are not dominated by one giant player like Gazprom in Russia, neither are they subject to infrastructure disruption caused by severe weather conditions, as was the case with oil and gas supplies following hurricane Katrina,” argues Milton Catelin, chief executive of the World Coal Institute.

In East Asia coal is set to remain the primary fuel, especially in China. Improving infrastructure links from China’s interior will help both coal and gas movements, though industry has first call on gas.

“We believe coal will remain cheap relative to the price of oil, at least until 2012,” said Whitman Fulton, manager at consulting firm ICF Intern-ational. ICF is forecasting oil prices to remain above $40 a barrel with gas priced to match. “Coal is relatively abundant and enjoys both a low cost of production and flexibility of supply. The greatest threat to coal is environmental legislation but, with the exception of Japan, these pressures are not likely to be seen in East Asia in the short to medium term.”

CLP may be relying on LNG for its Hong Kong operations but it believes a spread of fuels is key to the success of its wider interests across the region. Group director and managing director, Australia CLP Group, Richard McIndoe said, “The trebling of oil prices has highlighted the instability of international fuel markets. A balanced fuel mix is important for supply reliability and tariff management.” In McIndoe’s view, the winners will be those that use the process of consolidation in the industry to develop vertical integration as a hedge against fuel supply constraints.

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