Tour background

AGIT is a body dedicated to funding education and research relevant to the development of the Australian gas industry. AGIT funds the annual international study tour in order to assist in gathering information and reporting back to Australian industry on key gas sector developments in other regions. Study tour destinations alternate each year through Europe, North America and Asia.

This year the tour participants were Ross Evans (Origin Energy - Upstream), Jason Morony (APA Group - Networks) and Mark Frewin (TRUenergy - Retailing). Countries visited included Hong Kong, South Korea, Japan, Malaysia and Singapore.

Overview of trends

Key trends noted in this year’s tour included the surge in LNG demand emerging across Asia as countries seek to harness the economic and environmental benefits of this fuel. Many Asian cities are experiencing declining air quality as a result of the rapid industrialisation occurring in the region. Consequently, environmental concerns in North Asia are primarily focused around particulate emissions rather than carbon emissions in general. Security of energy supply is another key concern with LNG buyers seeking vertical integration into upstream LNG projects, and exporting countries reviewing their future export plans against their projected domestic needs. Concurrently, skills and resource shortages are limiting the speed at which LNG receiving terminals can be brought online in the short to mid term. These infrastructure restrictions, along with the rapid growth in demand, are putting significant upward pressure on LNG prices.

Many of the countries visited operate large monopoly industry structures, with competition focused between other fuels such as LPG and electricity, rather than between gas companies themselves. District heating and cooling plants are used in some countries where greenfield high density developments are being pursued, and Natural Gas Vehicle policies have been pursued to enhance air quality.

Hong Kong

Hong Kong has reticulated towngas, which has historically been produced from naphtha. Following the development of the Dapeng LNG terminal in the nearby Shenzen province, natural gas has become available as a towngas fuelstock. However, naphtha still remains the primary fuel. Gas is also piped from Dapeng to fuel power stations operated by Hong Kong Electric (owner of the Hong Kong Island electricity franchise) on Lama Island. China Light and Power (CLP) owns the electricity franchise for Kowloon and the New Territories, and receives gas supplies from the Yacheng field (near Hainan Island) to augment its power station fuel supplies. A reserve reassessment at the Yacheng field has led to it facing depletion earlier than expected. In response to this, CLP is proposing to develop an LNG import terminal, and has run an extensive environmental impact study on this development. Additional gas supplies will be necessary if the Hong Kong Government is to meet its ambitious particulate reduction targets.

Hong Kong has also made significant headway in converting its taxi fleet to use LPG. Not only has this achieved some environmental benefits, but it has also helped offset falling LPG demand which followed increasing towngas reticulation throughout the 1990s. Price caps imposed through concession agreements for some LPG fuel stations following this conversion created investment distortions which proved unsustainable. While towngas and electricity are operated under monopoly licences, they compete vigorously with each other and with LPG suppliers. In particular, it was noted that the suppliers of each of these commodities bid against each other to obtain the right to exclusively supply new real estate developments.

South Korea

South Korea has negligible domestic gas production, and operates three major LNG import terminals. Demand growth is likely to be met by a planned fourth import terminal, or possible exploration successes in the East Sea. Kogas has the mandate to import all LNG into South Korea, and this makes it the largest single LNG purchaser in the world. The Incheon LNG terminal is located not far from Seoul and developed on reclaimed land. It features 18 LNG tanks, and is currently constructing the largest underground LNG tank in the world. Last year 166 LNG cargos were unloaded at this terminal, and Kogas seeks to arrange more deliveries during the peak winter period than in summer in order to help manage the load factor of Korean demand. Incheon operates a combination of open rack and submerged heating vaporisers to re-gasify the LNG. With its highly developed industrial capabilities, South Korea has also been working on its own LNG tank technology, and a demonstration tank has been built at Incheon to prove this. Overall, strong LNG demand growth is expected from South Korea.

Japan

Japan is also a major LNG importer, and currently operates 27 import terminals. Unlike Korea, Japan does not operate a single buyer model, and each utility is responsible for procuring its own supplies from the international market. In order to secure long term supplies and manage price risk, buyers such as Tokyo Gas are seeking equity in upstream LNG projects such as the Timor Sea’s Bayu-Undan development.

Aside from direct reticulation of natural gas from LNG terminals, LNG is also trucked for reticulation in remote towns where connection to the pipeline network is not currently economic. Significant emphasis is also being placed on demand management, and domestic cogeneration systems have achieved some market penetration. Around 150 district heating and cooling plants also operate around Japan. At the Tokyo Gas R&D centre the group rode in hydrogen fuel cell cars, and visited a natural gas to hydrogen production plant supplying a Hydrogen fuel bowser. Domestic fuel cell co-generators are also being trialled and work is proceeding on development of a sulphur-free odorant, which will be more compatible with use of natural gas in fuel cells. At one of its LNG import terminals, Tokyo Gas has also found innovative ways to harness the low temperate of LNG, by using it to cool adjacent cold storage warehouses, and also in developing a demonstration cryogenic power station which uses the low temperature of LNG to drive a turbine.

Association of Southeast Asian Nations (ASEAN)

In Kuala Lumpur, the tour was hosted by Dr Allan Beasley, former Chief Executive of the Australian Pipeline Industry Association, and current executive director of the ASEAN Council on Petroleum (ASCOPE) gas centre – a body tasked by the ASEAN with facilitating development of a trans-ASEAN gas pipeline network. ASCOPE has found it most beneficial to focus on removing barriers to market based development, and is seeking incremental improvements to the trans-ASEAN environment such as standard and stable transit tariff approaches. In addition, ASCOPE has sought to develop a common understanding of the region’s supply/demand outlook – an important step in ensuring the appropriateness of long-life pipeline investments. The current outlook suggests higher cost supplies will need to be introduced from around 2015. This outlook has also forced some LNG exporters in the region to consider setting aside reserves for future domestic use, comparable to the current debate in Western Australia.

Malaysia

Petronas dominates the Malaysian gas sector, which produces 2,000 petajoules of gas per annum (PJ/a), 1,250 PJ/a of which is exported. Much of the domestic gas is used for power generation, although following the introduction of a price cap for domestic gas, power generation demand growth has fallen as investment has focused on the export sector. Despite this, Malaysia has developed several significant district cooling plants in recent years, and has also implemented a significant natural gas vehicle (NGV) conversion policy. The taxi fleet in Kuala Lumpur is largely converted to natural gas/petrol dual fuel, and 60 refuelling stations operate around the capital. It is planned to expand capacity to 200 stations in the next 18 months. NGV stations quote gas prices in per litre petrol equivalent, which has been a simple and effective marketing technique.

Bintulu is a town located in the state of Sarawak on the island of Borneo. Significant offshore oil and gas production occurs just off the coast of this town, which is the base for some major gas industry developments. The tour visited the LNG liquefaction plant at Bintulu, which provides 28 per cent of global LNG production capacity, and processes around 4 PJ per day of natural gas. A major fertiliser plant and a gas-to-liquids facility also operate at Bintulu, and consume significant quantities of raw gas.

Singapore

The final destination was Singapore, which has converted most of its power generation fleet to natural gas over the past decade. It has also converted the feedstock of its towngas production plant to gas from naphtha. These conversions have been facilitated by the development of two gas pipelines which import gas from Indonesia. More recently, a pipeline link to Malaysia has also been constructed. Conversion of some industrial and large commercial customers located near natural gas pipelines has also been able to proceed.

In addition to these infrastructure developments in Singapore, government policy has sought to implement competition in the wholesale and retail sectors of the Singapore gas market. Significant market design and industry restructuring work has been undertaken, and a software system to implement the new network code is near completion. It was also planned to merge the two state-owned pipelines under a single owner/operator, but this remains outstanding as discussions on appropriate valuations continue.

Aside from these market reforms, Singapore has also recently introduced a gas import control policy to increase supply diversity using an LNG import terminal. The import control policy requires all importers to buy their gas from a yet-to-be-appointed demand aggregator, until sufficient demand has been achieved to allow economic LNG procurement. While this policy remains in place, further development of a competitive wholesale market appears unlikely.

Not all work

In addition to exploring gas industry issues, the group also managed to perfect the art of ‘power tourism’ and had a look around each city in the limited time available. Some of the highlights included a visit to the Demilitarised Zone between North and South Korea, exploring the region’s significant shopping options, and visiting a range of religious sites. One of the particular pleasures (and at times challenges!) the group enjoyed was sampling the native foods of each country.

Conclusions

Overall, the group learned a significant amount about the gas industry across Asia, and found the tour a particularly rewarding personal and professional development experience. All the group members strongly recommend the tour to other gas industry professionals. Further details on the tour and application details for the 2008 tour can be found at www.agit.org.au