LNG supply and demand in Indonesia

What is the current situation of the gas market?
We launched our global gas security report at the LNG producer-consumer dialogue conference in Tokyo. Most of the participants in the LNG conference were talking about the increasing flexibility and liquidity of that market thanks to plenty of supply. Much of it comes from the US because the US shale-gas-based LNG comes to the market without any destination restrictions.
We will see a massive amount of new LNG capacity coming to the market, what we call the second wave of LNG investment supply. We will probably continue to have a well-supplied market through to the middle of the 2020s, but at the same time, thanks to the very affordable LNG prices, gas demand is increasing as we speak. In 2017, especially in China, we are already seeing something like 40% growth year-on-year in LNG imports, which is quite rapid. Depending on how demand develops, the timing of the market becoming tighter could be earlier than originally forecasted by many industry people.
On the supply side, at the same time, we just heard from Qatar that they are going to increase their LNG liquefaction capacity by 30%, which will probably be completed around 2024. We have not included that in the outlook for the gas market for 2017, but if that comes offline, then that will delay the timing.

How important is to have a flexible gas market?
We are proud that we have been ahead of the curve of market developments of LNG. We released the LNG Training Hub Report in early 2013, and we pointed out the critical importance of a more flexible natural gas LNG market.
Since then, the market has been developing in that direction. In that process, the co-operation or solidarity among importers was another important factor. There was some dialogue between Japan, [South] Korea and China in terms of moving toward more flexibility in LNG contracts and so forth. The bilateral discussion between Japan and India is along that line and we think that that is really important for the importers of LNG to continue their efforts and talk to their suppliers for the increased flexibility and liquidity. Even though the market is going in that direction, we continue to consider long-term arrangements a very important part of stable supply as well. A good balance, both in long-term and stable supply, and also in liquidity in the short-term market, is important for the market systems to allow better supplies and guarantees for both the supplier and consumer.

How do you see the export market?
We do not have any specific figures. It is all up to the consumers and importers. It all depends on what kind of resources they have. There are countries like Japan and Korea that are almost 100% dependent on the global LNG market. For those countries, it is important to have a secure supply.
On the other hand, countries such have China can increase the domestic supply, which they are working hard to do, including with shale gas developments, and they also have the option to increase pipeline imports from Central Asia, Myanmar, and Russia in the interim. For those countries, the requirements for LNG imports will be different from those countries who depend entirely on LNG. The best import mix will depend on the situation in the country of concern.

When you talk about contract flexibility, are you referring specifically to the destination clauses?
That is one aspect. In the global gas review, which was published recently, we have seen the continued trend toward flexibility in terms of the destination instructions. If you compare contracts that were signed in 2014 and before and then see the contracts in 2015 and 2016, there is a gradual decline of the share of the contracts with clauses based on fixed destinations. Even though it is not being done drastically, we are seeing solid changes on that.
Also, you could take a look at the trend in terms of the contract durations. We are seeing an increasing role being played by companies called portfolio players in terms of providing the risk-taking role in the long-term LNG supply development. The changes may not be so drastic, but supported by the lower price levels and the well-supplied markets, we are seeing gradual changes in the LNG market. I think that will be helpful in terms of supply security of LNG because the price signals will help determine where the specific LNG cargoes will go.

What kinds of levels of surplus could we be looking at into the 2020s?
The LNG supply capacity will grow to about 650 bcm [23 tcf] by 2022 and during the same time the LNG demand will increase to something less than 500 [17.7 tcf]. That means that the LNG capacity at the end of 2022 will be larger than the demand growth. There could be faster growth in demand. For example, we are seeing quite a rapid growth in China in 2017, but overall, we expect the supply growth to be larger.

Would you say that China is the wild card here?
Yes, but other Asian countries are as well. India is also planning to increase the role of natural gas in their energy systems. There are important challenges in terms of policies and infrastructure, but we hope that at the same time it will be very important in terms of the air quality of Chinese cities.

What is the role that Indonesia is playing in this?
Indonesia is now a supplier of LNG. We hope that they will continue to be a major player, but the future outlook for Indonesian supply growth is rather uncertain because it depends upon the future of the offshore project. We hope to see Indonesia looking good in terms of sustained supply for the future.

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