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Economic crisis heralds uncertain times for gas

It is becoming increasingly likely that the global economic crisis will result in substantially lower demand for gas in Asia over the next few years than was previously expected.

As ever, the impact of the downturn will not be felt evenly across the region, with the most commercially viable gas projects likely to proceed and some expanding economies continuing to seek out new sources of imports.

Yet lower than anticipated global demand for energy could reduce gas prices sufficiently to make piped gas and liquefied natural gas (LNG) more competitive with coal as a power sector feedstock, so it is difficult to predict whether falling revenues for gas exporters will be matched by lower consumption.

Indeed, gas prices have already fallen sharply in all four major Asian gas markets.

The dramatic fall in the price of oil from $147 a barrel in July to about $40/bl in mid-December has quickly fed through into lower gas prices. From a peak of $14.50-$20 per million Btu in August, the average price of gas in China, India, South Korea and Japan had fallen to $7-9.15/MMBtu by December 10.

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Against the backdrop of such widely fluctuating oil prices, it will be difficult to discern the impact of lower economic growth on gas prices. (See table: Falling Asian gas prices 2008)

Nevertheless, the economic turmoil is certain to have a sizeable bearing on both gas prices and demand.

Economic growth during 2009 in China, India and some other emerging Asian economies is expected to be lower than for several years but will remain fairly robust by historic standards.

Yet almost all Asian economies are heavily dependent on exports to industrialized nations, so the deteriorating global picture could have wide ranging ramifications.

In its November report, the IMF lowered its global economic forecast from 3% to 2.2% and the Fund's managing director, Dominique Strauss-Kahn, has indicated that future monthly reports are likely to paint an even bleaker picture.

The certainty of recession in Europe and North America is likely to reduce formerly-projected demand for power on Asian production lines over the next year.

This will feed through into lower than anticipated gas and electricity consumption by iron, steel, petrochemical and other energy-intensive industrial companies that supply raw materials to export-driven factories.

In November 2008, PetroChina conceded that the economic downturn had already affected the company's gas sales to chemical, fertilizer and metal alloy companies in Sichuan province.

Sichuan is the biggest gas consuming province in China and some local methanol producers have actually halted production because of lower demand, while the price of sulfur has fallen from Yuan 5,000/mt in April to Yuan 800/mt.

According to Korea Gas Corporation (Kogas), gas sales in South Korea in November 2008 were 4.4% lower than a year earlier, the equivalent of 2.44 million mt of LNG, as a result of lower demand from the power sector.

Japan's big ten power companies bought 2.98 million mt of LNG in November, 14.7% less than a year previously, although their actual consumption was 1.4% higher. In Taiwan, electricity consumption was a massive 10.7% lower in October than during the same month of 2007.

The market for spot LNG deliveries in Asia already seems to have dried up.

Some Atlantic Basin shipments have traditionally been shipped to Asia on the back of rising winter demand but research by Platts indicates that this trend did not eventuate in 2008, while lower industrial demand has allowed inventories to rise.

On the supply side it is also becoming apparent that shale gas production in the United States will be higher than previously forecast, so lower demand for LNG in the western US could free up production for customers on the opposite side of the Pacific.

Some LNG sector executives, however, are more upbeat about the industry's prospects.

Octavio Simoes, the vice president of Sempra LNG, which is one of Sakhalin Energy's main customers, commented: "We don't think there is going to be significant demand destruction.

"The economic downturn and other things will tend to bring that demand down some but we also think there are some factors pushing demand up such as the use of natural gas for environmental reasons. The additional supply coming online over the next couple of years will tend to keep prices at a level that will not impact demand."

Even within the industry, there is some doubt over how many new LNG trains will come on stream over the next few years. LNG consultant Andrew Flower predicts that global production capacity will increase from 175-million-mt/year in 2008 to 245-million-mt/year by 2011, while the UK-based BG Group expects the 2011 figure to reach 275-million-mt/year.

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