Even though oil and gas is the most traded product in the Asia Pacific region, there is virtually no energy trade across the Pacific. A new report released Sept. 29 in Washington by the Pacific Economic Co-operation Council (PECC) suggests that this anomaly could soon be corrected, resulting in an export bonanza for North America, more secure supplies of energy for Asia, and lower greenhouse gas emissions for the region.
Trans-Pacific trade in energy products (oil, gas and coal) accounts for only 1.4 per cent of global trade in those products. The segmentation of energy markets between Asia and the Americas is seen in the steep price differential for natural gas between the two regions, and – more recently – in a price differential for crude oil as well.
A number of developments in recent years have raised the possibility of trans-Pacific trade in oil and gas, and the emergence of a more integrated and competitive market in energy products in the Asia-Pacific region.
These developments include: the discovery of massive unconventional (shale) gas deposits in the United States and Canada that are creating a gas glut in North America; increased demand in Asian countries for less carbon-intensive energy sources, in particular a shift away from coal to natural gas; concerns about nuclear power following the Fukushima Daiichi disaster and the resulting search for clean alternatives to nuclear energy; the changing energy balance in Southeast Asia, particularly Indonesia and Malaysia, which will soon be net importers of natural gas; rapidly growing investment by Asian national oil and gas companies in North American energy assets, especially in the Canadian oil sands.
Asian countries are highly reliant on fossil fuels. Oil is the fuel of choice in most Asian economies, accounting for 40 per cent or more of energy needs. (The key exception is China, which relies heavily on coal.)
The basic patterns of energy use in the Asia region are unlikely to change materially in the foreseeable future. Even under an assumption of new national policies to reduce greenhouse gas emissions, fossil fuels will account for 60- to 80-per-cent of the energy mix in most economies. The share of coal, however, is expected to decline sharply, especially in China, which will see a fall from around 70 per cent in 2010 to 38 per cent in 2035. On the other hand, the share of natural gas in Asia’s energy mix is expected to double by 2035, reflecting its status as a cleaner fossil fuel.
The effect of the North American gas glut, coupled with a surge in Asian demand, has been to widen natural gas price differentials between North America and Asia. Historically, natural gas in Asia has been priced at a premium relative to North American natural gas because of limited competition, long-term contracts, and indexation to oil prices. In recent years, the price differentials have widened considerably, with the current gap between the Japan contract price and the (North American) Henry Hub price in 2011 at an astonishing $12.50/MMBtu.
Even taking into account the higher cost of shale gas production, the substantial investments required to build pipelines and liquefaction plants, and the transportation cost of shipping LNG across the Pacific, North American gas could be competitive in Asia against existing suppliers, or at the very least serve as a secondary source of supply for Northeast Asian countries looking to diversify their energy imports or seeking more secure sources.
At current prices, the break-even export price is estimated to be around $9.60 (U.S)/MMBtu for U.S. Gulf Coast terminals and $7.40 (U.S.)/MMBtu for Canadian export terminals, both of which are comfortably below the recent Japanese contract price of $16.70(U.S.)/MMBtu.
