The future of Asian LNG supply – backfill or bust

Projects must move fast to take advantage of strong LNG prices and contracting fever

1 minute read

At the risk of sounding like a broken record, the outlook for Asian gas demand is overwhelmingly positive. Despite ongoing pandemic restrictions, sky-high spot prices and rising competition from renewables, the region’s gas consumption will grow at almost 3% a year over the next decade. Peak demand doesn’t feature in our base case until beyond 2050, while in our 2-degree Accelerated Energy Transition scenario (AET-2), more rapid decarbonisation barely impacts Asian gas demand by 2040. 

Asia’s biggest gas market challenge is now meeting demand. The near-certain long-term decline in regional gas production makes rising import dependency inevitable, future-proofing future Asian LNG demand: we expect imports to grow at a heady 3.7% a year over the next decade. Today, China is driving demand growth, while looking further forward, Southeast Asia and South Asia become the fastest growing LNG markets in the world. 

As Asian demand has climbed, new long-term LNG contracting rebounded to its highest level in five years in 2021, with Asian buyers accounting for 85% of global contracting. Much of this newly contracted supply will come from Qatar and the US, plugging the fast-growing gap between Asian gas demand and declining indigenous supply across much of the region.

Any previous assumptions that Asia Pacific’s undeveloped and yet-to-find gas resources will fill much of the region’s emerging supply-demand gap have been poleaxed by weak E&A activity and low commercial conversion rates. In his recent Insight on Asia’s looming gas supply crisis, my colleague Angus Rodger sees a downside scenario where chronic underinvestment across Asian upstream projects could require up to a whopping 240 mmtpa of additional LNG by 2040 – almost double our base case supply-demand gap of 275 mmtpa by this time.

With LNG prices at record levels and Asia’s buyers hungry for new contracts to meet surging demand, why aren’t the region’s LNG backfill projects first in line for investment?

For Asia Pacific’s LNG backfill opportunities, time is of essence

With several undeveloped LNG backfill opportunities across Asia Pacific yet to be developed, the window of opportunity risks closing. Woodside and Santos showed what can be done with last year’s FIDs on the Scarborough/Pluto T2 expansion and the Barossa gas project to backfill Darwin LNG. But for two of the region’s oldest and largest LNG projects, the North West Shelf (NWS) in Australia and Bontang in Indonesia, progress on up to 15 mmtpa of potential backfill supply remains painfully slow. Backfill options at both projects are not low cost and for both major decisions loom: prioritise backfill developments or start shutting in trains.

As my colleague Daniel Toleman in our APAC Gas & LNG team repeatedly tells me, “Against a backdrop of record-high LNG prices and strong regional gas demand, time is of the essence.”

North West Shelf and Bontang – fighting to stay full

The NWS needs new supply to keep its five trains full, with third-party deals signed to date only a stopgap. But while a ‘best case’ outcome could see around 10 mmtpa of output being supported through backfills, all options present their own challenges. Browse, a leading backfill contender, looks unlikely to be developed this decade given high costs, environmental concerns and misalignment in the joint venture. And with CO2 levels up to 12%, carbon capture and storage will be a necessity, adding complexity and cost to an already tough project.

Among other options, the Clio-Acme fields are more likely to be prioritised to backfill Chevron’s Wheatstone project, given the company’s decision to sell its NWS stake and focus instead on this early life, core operated project. Recent reserves reductions at Woodside’s Wheatstone supply fields could also help get Clio-Acme moving.

Indonesia’s legacy Bontang project continues to face major uncertainties around existing supply. With issues at Eni’s Merakes and PERTAMINA’s Offshore Mahakam, East Kalimantan (Attaka) and Sanga Sanga PSCs, customers are already being asked to expect cargo deferrals or cancellations this year.

Looking to remedy this, fiscal incentives granted in 2021 to fields like Offshore Mahakam, together with soaring prices, should help PERTAMINA increase backfill drilling. Fighting a severe decline at Mahakam, we expect PERTAMINA to offer farm-in opportunities in 2022.

Elsewhere, continuing production issues at Merakes could threaten Eni's plans to boost supply to Bontang by 2023. If challenges persist, Eni will have to choose between infill drilling on Jangkrik to arrest decline or bring forward future tie-ins. 

An outcome on Chevron’s sale of its Indonesian Deepwater Development (IDD) must come soon. On the market since 2019, a deal is realistically needed this year for IDD’s gas to replace declining output at Bontang before the end of this decade. A lot remains to be done, including agreement on price, government approval on a PSC extension and authorisation of a new development plan. Do not hold your breath.

Elsewhere, a wildcard for 2022 would be the government of Papua New Guinea agreeing to a deal with the ExxonMobil-led P'nyang gas joint venture to bring the project back into the pipeline, putting PNG LNG Train 3 on the table once more.

Government support remains critical

There is little doubt that operators and partners want to push backfill projects forwards and cash in on Asian LNG demand – watching from the sidelines as competing projects sign valuable long-term contracts is not much fun. But developers risk missing out unless governments do more to incentivise backfill opportunities, including reviewing current upstream incentives and fiscal goals (Indonesia and PNG) and carbon capture (Australia). 

Because upstream companies are set for a period of increased profitability, any efforts by government to improve terms or provide additional support are likely to be politically volatile. But the way things currently stand, Asia Pacific’s LNG backfills risk losing out to rivals like Qatar, Russia and the US unless local regimes compete harder for future investment dollars.

Driven by economic growth, pro-gas policies and decarbonisation, Asian gas demand growth looks future-proofed. Far less certain is the region’s ability to develop its own gas resources to help meet this demand. Rising import dependency is now inevitable, confirmed by current appetite for new long-term LNG contracting.

With LNG prices at record levels and Asia’s buyers hungry for new contracts to meet surging demand, why aren’t the region’s LNG backfill projects first in line for investment?

Read also: Gas and LNG: predictions for 2022

APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.