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 INSIGHT
August 2014 Issue 99

Asia Pacific
Oil and Gas
BMIs monthly market intelligence, trend analysis and forecasts for the oil and gas industry across Asia Pacific ISSN: 1750-7537

India Contents

Licensing, Price Reforms Pose India................................................................................................ 1

Licensing, Price Reforms Pose Production Upside..................................................... 1

Production Upside Bangladesh...................................................................................... 2

BMI View: India's upstream segment will enjoy a substantial boost if
two key reforms are implemented: licensing and price. While reform
momentum is strong, we note that price reform in particular could be
delayed by political opposition.
NELP Fails To Sustain Growth
India % y-o-y chg In Crude Oil & Natural Gas Production, 2006-2016
Government Spending Seeks To Plug Energy Shortages........................................... 2
Australia ......................................................................................... 4
Woodside Sale Reiterates Weak LNG Sentiment....................................................... 4
China .............................................................................................. 5
Crude Oil Imports: Middle East To Make Up For 2014 Outages.................................. 5
Gas Imports: Market Hopefuls To Lose Out From Russian Entry................................ 7
Japan............................................................................................. 10
Gas Pipeline Hopes To Replicate China Price Success..............................................10
Indonesia ...................................................................................... 11
Cost Challenges For Industry Cooperation..............................................................11

e/f=BMI estimate/forecast. Source: EIA, BMI

Narendra Modi's government is swinging into action to assure oil and

gas investors. The oil ministry is promising 'predictable, fair' policies
for the oil and gas (O&G) industry, which has long bemoaned India's
unfavourable contract terms and excessive red tape. An official statement
specifically stated that new policies will 'ease the way for large foreign
investment', as international oil companies (IOCs) have long been mar-
ginalised in India's heavily state-dominated O&G sector.
There are few details or indications of how these policies would look
at the time of writing. However, the oil ministry hinted that there could
be changes to licensing terms for exploration and production (E&P). It
also suggested that a 'uniform licensing policy' under 'a single policy
regime' could be applied across all upstream contracts. This will replace
the various regulatory regimes that differentiate between E&P of coal-
bed methane (CBM), New Exploration Licensing Policy (NELP) blocks
and potentially shale gas, for which regulation was still in the midst of
drafting under the previous government.
The new regime could also see a shift from contracts governed by
profit-sharing to one by revenue-sharing. Most importantly is the indi-
cation that new licences will be issued 'with all statutory clearances',
allowing E&P to proceed without obstruction from other ministries.

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Bangladesh
Reducing Licensing Confusion
The standardisation of block licensing is a welcome move. This will
reduce the paperwork for companies wishing to venture into dif-
ferent types of E&P from offshore to unconventional. In particular,
the issuing of licences with statutory clearances will significantly
raise the appeal of E&P investment. We have long highlighted that
India's biggest obstacle is not the lack of below-ground promise,
but excessive bureaucracy. Of 360 blocks offered under NELP since
1999, only 166 blocks are actively explored. Of these blocks, only
the KG-D6 field operated by Reliance Industries is producing com-
mercially, despite USD21.3bn of investment and 128 discoveries
made to date.
The oil ministry's failure to coordinate activities with other
government bodies has seen exploration blocked by organisa-
tions ranging from the Ministry of Environment & Forests to the
Department of Space. This has prompted foreign investors from
BHP Billiton to Eni to exit the country, leaving much of India's
acreage underexplored (see 'Fragmented Regulatory Regime
Pushes Investors Out', October 21 2013). Guarantees for E&P
work will significantly improve if the Oil Ministry secures ex-
ploration approval from other Indian governmental bodies before
distributing licences.
Gas To Miss Growth Without Reform
India Crude Oil (LHS, 000b/d) & Gas (RHS, bcm) Production, 2012-2023
e/f = BMI estimate/forecast. Source: EIA, BMI
Pricing Challenges
A better licensing regime could very well materialise if the Modi
government capitalise on the strong reform momentum in India
following his landslide victory to push through these changes as
quickly as possible. However, another key reform needed to reju-
venate India's upstream is gas price increases, without which, the
incentive for upstream investment will remain poor. BP, one of the
partners of the troubled KG-D6 field, again stepped up pressure for
the new government to push through with a doubling of gas prices at
the wellhead at the World Petroleum Congress in June 2014. Chief
executive Bob Dudley explicitly stated that the pace of gas price
reform in India 'has been disappointing'. He also pointedly stated
the irony that it is more profitable for firms to target the Indian gas
market by producing in Australia where cost overruns have been
a major source of profit concern and exporting it to India than to
produce domestically.
Although an anonymous source from the Oil Ministry stated
that the price hike could be announced by July 2014, Oil Min-
ister Dharmendra Pradhan's contradictory 'pro-poor' pricing
approach and emphasis on energy self-reliance could see this
2 www.oilandgasinsight.com
Asia Oil & Gas
further delayed. Upon election, Pradhan declared that Modi's
declaration to 'work for the betterment of the poor' will also be
'my ministry's guiding principle' will make it difficult for India to
raise gas prices to boost upstream investment without alienating
supporters. Aam Aadmi Party (AAP), which also had a remark-
able showing at the recent elections, has openly slammed gas
price hikes for benefiting no one but Reliance Industries, whose
KG-D6 field is India's largest gas discovery to date. The politi-
cally contentious nature of gas pricing poses significant risks that
the government may reconsider the Rangarajan formula, or to
incrementally raise prices from USD4.2 per mn British Thermal
Units (mnBTU) to USD8.4/mnBTU than to immediately double
prices as originally intended.
Small Window Of Opportunity For Modification
High energy prices will likely push the government to implement
painful but necessary reforms to wean India off its growing energy
import dependence. Without seizing on the momentum for reform
generated by Modi's victory, however, reforms risk being stuck
on the drawing board as the Modi fever fades. Our natural gas
forecast is currently pricing in an improvement in the gas price
formula. Without this change we see down side risk to gas output
over the forecast (see 'Modi Operandi Unclear On Gas Price',
June 5). However we note that reforms to both prices and the
licensing regime within 2014 will boost the prospects of India's
upstream segment especially towards the tail-end of our forecast
period from 2014 to 2023.
Bangladesh
Government Spending Seeks To
Plug Energy Shortages
BMI View: The government's decision to increase spending on
developing the oil and gas industry is a positive move that may help
to increase the availability of oil and gas to Bangladesh. This could
reduce the country's power shortages, while providing investment
opportunities in the Infrastructure sector.
Positive Growth Outlook
Bangladesh Real GDP Growth (%)
f = BMI forecast. Source: Bangladesh Bureau of Statistics, BMI
Bangladesh's decision to dedicate more government spending on devel-
oping the oil and gas (O&G) industry is a positive move. According to
Platts, the tentative FY2014/2015 budget will see a 16.4% year-on-year
(y-o-y) growth in O&G expenditure to BDT22.23bn (USD285mn).
Bangladesh
Major projects that spending will support include:
Drilling of 13 natural gas development wells;
New gas pipelines linking gas fields in north east Bangladesh
to Dhaka, Chittagong and to the south west regions;
Increase gas fractionation to raise gasoil and gasoline pro-
duction from condensates;
Construction of 13 new oil storage tanks with combined
capacity of 65,500mn tonnes;
Completion of a 5mn tonnes per annum (tpa) floating LNG
storage and regasification unit (FSRU), to be located at
Moheshkali Island, by 2015.
Most of these projects will be undertaken by state-owned Bang-
ladesh Petroleum Exploration and Production Company (Bapex)
and Bangladesh Petroleum Corporation.
Short-Term Reliance On Gas To Stay
Bangladesh Installed Power Capacity By Energy Type, June 2014 (MW)
Source: Bangladesh Power Development Board
Economic Growth Creates Needs
This spending, aimed at increasing the country's access to oil and
gas resources, is important to reduce energy shortages that threaten
to slow Bangladesh's economic growth. Our Country Risk team is
optimistic that the country will see real GDP growth increase to 6.3%
for FY2014/2015 on the back of better political stability and positive
investment sentiment particularly in the garment sector (see 'Recovery
On Track But Challenges Remain'). However, we also note this is
contingent on the constant supply of electricity to power the economy.
The focus on gas investment reinstates the importance of gas to
the country, which makes up 75% of total energy needs. 65% of
total installed power generation capacity in Bangladesh is gas-fired.
Although coal and nuclear will increase their share of total generation
when new plants are completed in the next five years, in the short-
term Bangladesh will remain reliant on gas to meet its power needs.
Domestic gas production has increased in the past five years but the
increase has not been sufficient to meet the country's growing gas needs.
As a result, the power sector has had to turn to oil, which can contribute
up to 26% of the country's power needs. This has come at a cost with
high oil prices squeezing the profit margins of Bangladesh's utilities.
The planned government investment in FY2014/2015 meets the
following goals:
Increase domestic gas and liquids supplies: By fractionat-
ing gas, Bangladesh can increase domestic oil supplies and
direct imports from the consumer sector to the power sector.
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Asia Oil & Gas
Upstream development will also crucially boost its domestic
gas production base.
Increase domestic gas supplies and connectivity: Infrastruc-
ture connectivity could incentivise greater investment into
the country's upstream; according to the Ministry of Power,
Energy and Mineral Resources, international oil companies
(IOCs) make up more than 50% of the country's total gas
production. The LNG import terminal will also allow Bang-
ladesh to plug its short-term gas shortages with imports to
avoid disruptions to the power sector (see 'First LNG Will
Help, But Energy Deficit To Persist', January 24).
Control import costs: The oil storage tanks will allow Bang-
ladesh to buy oil at lower prices for use at a later stage to
control its oil import costs.
Infrastructure Opportunities
The outlined government spending is positive for the power sec-
tor, providing feedstock to support electricity generation until new
coal and nuclear plants come online by 2018. It is also a boon for
construction as Bangladesh builds pipelines as well as oil and gas
production and storage facilities to meet its consumption needs.
Gas Output Insufficient To Meet Growing Needs
Bangladesh Gas Production, 2008-2012 (bcm)
Source: EIA
However, we highlight the following risks that could slow these
crucial developments, delaying the returns to both investors and
Bangladesh from the rise in government spending:
Poor business environment: Our Country Risk team points
out the high incidence of corruption, bureaucratic inef-
ficiencies and weak institutional capacity as key failings of
Bangladesh's operating environment. Thus, not all of the
government expenditure would necessarily translate into
investment opportunities.
Poor banking environment: Investors could find difficulty
financing these projects within Bangladesh, given weakness
in the country's banking sector. Opportunities could thus be
limited to well-funded foreign investors with a ready pool
of finances.
Importance of private investment in the upstream segment: Bang-
ladesh's upstream development has been spurred by private invest-
ment. While NOCs such as Bapex would support production, we
note that longer term production potential particularly from the
underexplored offshore will most likely require IOC assistance
to unlock resources trapped in formations requiring high technical
3
Australia
expertise to extract. Thus, we do not expect a massive output boost
from Bapex. We also note that resolution of a maritime dispute with
India over the Bay of Bengal will also be necessary to further open
offshore exploration and production.
Australia
Woodside Sale Reiterates Weak
LNG Sentiment
BMI View: While Shell's farming-down of its interest in Woodside
Petroleum was widely anticipated by the industry, the reduction of its
exposure to Australia also reiterates the weak outlook of Australia's
liquefied natural gas (LNG) market.
Shell has proceeded to cut its exposure to the Australian LNG mar-
ket, through the sale of 19% of its stake in major Australian player
Woodside Petroleum. Woodside will be buying back about 78.3mn
shares about 9.5% of total shares issued by Woodside held by
Shell at USD2.68bn, which equates to about USD34.23 per share.
Prior to the trading halt to facilitate this transfer, Woodside was
trading at about AUD42.87 (USD40.16) per share; therefore Shell
is offloading its stake at a 20% discount to market value.
Moving Closer To USD15bn Divestment Goal
Shell Divestments To Date As Share Of Total Divestment Target
Source: Shell, BMI Research
According to Reuters, Shell will be selling another 78.3mn shares
to investors at AUD41.35 (USD38.74) per share which is still
about 3.5% less than the price at which Woodside closed on June
16 2014. Altogether, the sale, subject to shareholder and regulatory
approval, will fetch Shell about USD5.71bn, bringing Shell's total
gross divestment to date (excluding undisclosed proceeds from
Italian downstream assets to Kuwait International Petroleum) to
about USD11.08bn or about 74% of its divestment target for 2014.
Offloading Further
The sale of Woodside is the largest divestment for Shell in the year-
to-date. This is the second time that Shell is selling off its stake in
Woodside, a firm that was once a takeover target for the Anglo-Dutch
supermajor in 2001. In November 2010, Shell reduced its holding
in the Australian firm from about 33% to 23% at about AUD42.23
per share. Shell also suggested in November 2013 that it could sell
off the remaining 23% in 2014. The decision to offload just 19% is
thus less than what the industry has been expecting.
Nonetheless, Shell's decision to farm-down its position in Wood-
4 www.oilandgasinsight.com
Asia Oil & Gas
side is a reflection of sentiments regarding the Australian LNG
market, of which Woodside is a major player.
The Australian firm is the operator of two of three existing LNG
production plants in Australia North West Shelf and Pluto and
was to have two more prospective LNG export projects: Browse
LNG, tapping gas resources in the emerging gas region in the Browse
Basin, and Sunrise LNG, which was to develop gas resources in the
Joint Development and Production Area (JDPA) in the Timor Sea
shared by Australia and Timor-Leste.
Australia: Hotbed for Asset Shedding
Share Of Australia In Shells Total Divestment Value In Year To Date
*Based on estimate of about USD1.5bn in asset sale; actual amount has been kept
confidential by Shell and Kuwait International Petroleum. Source: Shell, BMI
However, commercialisation of these projects has become in-
creasingly difficult owing to rising development costs. Sunrise LNG
is not likely to move ahead in the short-term unless the Timor-Leste
government agrees to a cheaper floating production concept to an
onshore plant, while Browse LNG will continue to be stalled by
uncertainty surrounding LNG prices and demand.
Shell will not be exiting altogether from the Australian LNG
market by reducing its position in Woodside. It remains an equity
partner in North West Shelf LNG, Gorgon LNG, Sunrise LNG and
Browse LNG. Moreover, it is still leading and developing the Prelude
LNG project in Australia. However, its divested portfolio in the year-
to-date clearly highlights its intention to cut its exposure to a market
that no longer looks as profitable as before: margins are threatened by
both a high-cost environment particularly from labour and buyers
fiercely negotiating down the prices of long-term supply contracts.
Its decision to sell its 8% stake in the Wheatstone-Iago gas project
and 6.4% in the Wheatstone LNG project in January 2014 already
provided a hint that Australian LNG is losing its lustre for Shell.
Resisting The Down Under
We note that this divestment also highlights a further weakening of
Shell's presence both in the upstream and downstream in Australia.
With the 19% sale of Woodside, we expect Shell's total divest-
ment from Australia to make up at least 75% of the total value of
Shell's divestment to date. The supermajor has postponed a final
investment decision (FID) on the Arrow LNG project, to be based
in Queensland and tapping coal-bed methane (CBM) as its source,
from 2014 to 2015. However, challenging production rates of
CBM and cost overruns have similarly diminished the prospects
of Queensland LNG projects. A labour cutback from Arrow LNG
suggests that the project could be axed altogether unless there is
significant improvement in both CBM production and appetite for
LNG at favourable prices neither of which are scenarios we see
likely to play out between now and 2015 (see 'Sale of Wheatstone
China
Bodes Ill For Arrow', January 23).
Shell's smaller interest in Woodside will not necessarily worsen
Australia's gas production and LNG outlook; Woodside could gain
more leeway in proceeding with projects that Shell's increasingly
cautious investment approach obstructs. However, the continued
equity presence of Shell in key Woodside projects Browse and
Sunrise in particular will remain a considerable roadblock to a FID
on these projects. Shell is likely to look to offload its interests in
these troubled projects but will face difficulty finding buyers given
the challenging climate for Australia's LNG sector.
China
Crude Oil Imports: Middle East
To Make Up For 2014 Outages
BMI View: The Middle East retained its share of China's crude
oil import market in 2013 and we expect Iraq and other Middle
Eastern countries to continue to make up for outages elsewhere in
the region. Other countries expected to benefit from our outlook for
growth in Chinese crude oil import demand are Colombia, Nigeria
and South Sudan.
Refining Growth Keeps Crude Imports Up
China Crude Oil Imports (000b/d)
Source: China General Customs Administration, BMI
China's total crude oil imports in 2013 grew 4.07% year-on-year
(y-o-y) from 5.44mn barrels per day (b/d) to 5.67mn b/d on the back
of growing domestic refinery demand. This is a trend that is set to
continue in tandem, though growth is likely to slow alongside a
cooling appetite for refining expansion in China.
As with 2012, the 10 largest exporters of crude oil to China con-
tinue to constitute about 80% of total Chinese oil imports. However,
China's largest partners Saudi Arabia and Angola failed to cap-
ture gains from the increase in crude imports in 2013. Iran owing
to sanctions and Kuwait also did not benefit from Chinese crude
demand growth. However, the other six of China's 10 largest crude
suppliers were able to boost exports to the Asian giant.
Exporters Gain Little From Demand Growth
Both Saudi Arabia and Angola saw their market share of Chinese
oil demand contract slightly. Saudi's share of the Chinese market
fell from 19.9% in 2012 to 19.1% in 2013, while absolute exports to
China remained flat at 1.08mn b/d. Angolan crude made up 14.2%
of the Chinese market in 2013, compared to 14.8% in 2012. The
total quantity of Angolan crude imports into China also fell slightly
www.oilandgasinsight.com
Asia Oil & Gas
from 806,430b/d in 2012 to 803,550b/d in 2013.
This provides support for our view that China will diversify its
sources of crude oil to reduce reliance on Saudi Arabia and An-
gola (see 'Winners And Losers Of Crude Oil Import Boom', June
14 2013), which together still constitutes a third of total Chinese
crude oil imports. Continued unrest in Libya and South Sudan could
stabilise these countries' share of the Chinese market; Saudi Arabia
remains the country with the world's largest available spare capacity
to make up for lost output, while we continue to expect Angolan
crude oil production to rise to help support global oil production.
Nonetheless, we see little room for a significant expansion of their
share of China's crude oil market.
Middle East Remains Dominant
China Crude Oil Imports By Region (Top, 000b/d) & Share Of Chinese
Crude Oil Imports By Region (Bottom, %)
Source: China General Customs Administration, BMI
Middle East Makes Up Shortfall Still
Despite outages from Iran and Libya, the Middle East and North
Africa (MENA) region maintains its market share of China's oil
import market in 2012 at about 53.9% in total. Iraq, Oman and
the UAE all recorded strong growth in export volumes to China.
Together, they made up for reduced supply from Iran and Libya,
supporting their positions amongst China's 10 largest sources of
crude oil.
Iraqi Growth Remains Strong
Iraq saw the greatest y-o-y increase, as oil exports to China rose by
49.9% y-o-y from 314,980b/d to 472,210b/d. This is in line with
our expectations that Iraq will be the biggest winner from western
sanctions on Iran. In fact, China also grew in importance as a market
for Iraq, making up 19.8% of total Iraqi crude exports in 2013 from
13.0% in 2012.
5
China
With PetroChina fronting the large Rumalia and Halfaya oil
developments in Iraq, we expect a sizeable proportion of output
increase to be shipped to China. Hence, Iraqi oil exports could con-
tinue to grow. The spread of tensions in northern Iraq to the south,
where the majority of large Iraqi fields are located, could disrupt
Iraqi production and its export potential. While this is not our core
view (see 'No Immediate Threat To Oil Supply', June 17), we note
that this poses a significant risk to continued growth of Iraq's share
in the Chinese crude oil import market.
Stagnant Chinese Import Demand Growth For
Saudi, Angola Crude
Crude Oil Exports To China (000b/d)
Source: China Customs General Administration, BMI
Oman also saw a strong surge in exports to China in 2013, as it
moves two places up to overtake Russia and Iran as China's third
largest oil exporter. It supplied China with 511,730b/d of oil, a
30.2% y-o-y increase from the 393,080b/d delivered to China in
2012. This is broadly in line with Oman's oil production growth;
according to the US Energy Information Administration (EIA) total
crude oil and liquids output rose 2.3% from 923,400b/d in 2012 to
944,800b/d in 2013.
Mutual Deepening Of Oil Trade Dependence
Iraq Total Crude Oil & Liquids Production & Crude Oil Exports To China
(000b/d)
Source: EIA, China General Customs Administration
While it has successfully capitalised on lost volumes from
Sudan, Libya and Iran to expand its share of the Chinese market,
Oman's growing exposure to China also means that it is increasingly
vulnerable to a crude oil demand shock in China. A slowdown in
downstream expansion will also slow the rate of Chinese crude
demand, therefore limiting opportunities for Oman to increase the
6 www.oilandgasinsight.com
Asia Oil & Gas
absolute volume of exports to China.
Brazil's Loss, Colombia's Gain
Another of our view that played out in 2013 is for Brazilian crude
oil exports to China to fall (see 'Winners And Losers Of Crude
Oil Import Boom', June 14 2013). Brazil's share of China's crude
imports continued to fall from 2.2% in 2012 to 1.9% in 2013, as
y-o-y export volumes to China fell 13.7% from 121,910b/d in 2012
to 105,250b/d in 2013.
Exposure To China Grows
Oman Total Crude Oil & Other Liquids Production & Crude Oil Exports
To China (000b/d)
Source: EIA, China General Customs Administration
Colombia's share of the Chinese market rose 3.0% even as Brazil's
share fell by the same amount between 2012 and 2013. The Andean
country exported 79,100b/d to China in 2013, up 35.4% from the
2012 average of 58,410b/d. The 20,690b/d growth in Colombian
exports to China made up 34.8% of total Colombian crude oil pro-
duction growth over the same period. Our positive growth forecast
for Colombia, weak demand growth in the US, slower export growth
from other Latin American countries and continued outages from
major global crude oil suppliers will allow Colombia to continue to
capture opportunities afforded by China's slower but still growing
crude oil demand.
Colombia Rides On Brazilian Fall
Latin America Crude Oil Exports To China (000b/d)
Source: China Customs General Administration
Outage Risks To Limit Africa's Growth
As expected, a Sino-Nigerian oil-for-loans deal signed in July 2013
helped to boost Nigeria crude exports to China, which rose 12.4%
y-o-y in 2013. However, at 21,140b/d we note that Nigerian crude
China
represented less than 0.5% of China's total crude imports in 2013.
While China only made up 1.2% of total Nigerian exports in 2013,
we note that this is an increase from the 1.0% in 2012, and remark-
able in view of the 7.2% y-o-y fall in total Nigerian exports in 2013.
China Provides Market For Production Increase
Colombia Total Crude Oil & Liquids Production & Crude Oil Exports To
China (000b/d)
Source: EIA, China General Customs Administration
Growing Chinese investment into Nigeria's upstream segment
could promote greater export volumes to China (see 'China Oil Trade
Could Spur Hydrocarbon, Infrastructure Sectors', July 10 2013).
The first four months of 2014 has seen a remarkable increase in
Nigerian exports to China, with Nigerian crude to China averaging
51,270b/d. If this is sustained throughout the year, Nigeria could
increase its market share in China to nearly 1.0%, though we note
that the country's frequent production outages could limit the rate
of growth in exports to China.
China: Growth Market For Nigeria
Nigeria Total Crude Exports & Crude Exports To China (000b/d)
Source: Central Bank of Nigeria, China General Customs Administration
The return of South Sudanese crude to the market in 2013 sup-
ported sub-Saharan Africa's (SSA) share of the Chinese crude import
market at around 20.8%. South Sudan added 70,110b/d to SSA's total
exports to China, and was the region's third largest crude supplier
to China in 2013. In fact, since production restarted in July 2013,
China imported about 137,347b/d on average between July 2013
and April 2014. Local tensions obstructed production and pulled
down exports volumes in March and April 2014, though a temporary
political resolution should help stabilise production over the year.
However, like Nigeria we note high downside risks unless there is
a permanent political resolution in South Sudan.
www.oilandgasinsight.com
Asia Oil & Gas
Gas Imports: Market Hopefuls
To Lose Out From Russian Entry
BMI View: Qatar and Turkmenistan are the first movers into
China's gas market and the main beneficiaries from China's gas
demand surge. However, China's move to diversify its sources of gas
will see Turkmenistan and Qatar lose market share in the Chinese
market in the future. Russia is set to emerge as another dominant
gas supplier to China, thereby reducing the available market size of
hopeful Canadian and Tanzanian LNG producers eying the Chinese
gas demand growth.
Imports Continue To Hike
China Total Gas Imports (bcm)
Source: China Customs General Administration
In June 2013, we assessed the Chinese gas market and looked at the
likely beneficiaries of Chinese gas import demand growth (see 'Gas
Demand Boom: Winners And Losers', June 23 2013). We revisit our
conclusions, and specifically consider how the Sino-Russian gas
agreement, signed in May 2014, changes the outlook for existing
players and prospects.
China's gas demand growth underpins a surge in gas imports. In
2013, gas imports increased by 47.1% year-on-year (y-o-y) from
31.8bn cubic metres (bcm) in 2012 to 46.8bcm in 2013.
Unlike 2012, liquefied natural gas (LNG) imports made up more
than 50% of total gas imports, thanks to a surge in LNG imports from
Australia and Malaysia. LNG import growth represented 68.1% of
total gas import growth.
Pipeline imports also recorded an impressive 27.4% y-o-y growth
in 2013, as supplies from Kazakhstan and Myanmar started flowing,
while Uzbekistan continued to deliver more gas into China.
Leaders See Market Share Shrink
As we had projected, Turkmenistan and Qatar continue to be the
short-term beneficiaries of China's gas import growth (see 'Gas
Demand Boom: Winners And Losers', June 23 2013). Between
2012 and 2013, the total volume of Turkmen gas flowing into China
increased by 13.1%, while total LNG shipped to China from Qatar
rose by 35.6%.
However, as with oil (see 'Crude Oil Imports: Middle East To
Make Up For 2014 Outages', June 20), China's top import partners
for gas saw their share of the Chinese market shrink as China seeks
to diversify its sources of energy imports. Turkmenistan, which
made up 59.5% of total Chinese gas imports in 2012, saw its market
share fall to 46.5% in 2013. Qatar's market share shrunk by a smaller
extent, from 19.0% in 2012 to 17.8% in 2013.
7
China Asia Oil & Gas

New Pipeline Entrants Share To Rise
This is a pattern that is set to continue through the rest of the decade
as China's options for gas imports increase. We maintain our view
that Myanmar and Central Asian countries, in particular Kazakhstan,
will benefit from rising Chinese gas imports (see 'Gas Demand
Boom: Winners And Losers', June 23 2013).
Likewise, the start-up of the Myanmar-China gas pipeline in Q3
2014 will facilitate greater exports volumes from Myanmar to the
southern provinces of China. We expect Myanmarese gas to China
to rise from 0.17bcm in 2013 to at least 1.6bcm in 2014, given that
total gas from Myanmar already came in at 0.58bcm for the first
four months of 2014 (4M 14).

2013: LNG Increased Share Of Total Imports Diversification Sees Reduction In Largest
China Distribution Of Gas Imports, 2012 & 2013 (Top & Bottom)
Partners Market Share
China Sources Of Gas Imports, 2012 & 2013 (Top & Bottom)

Source: China Customs General Administration, BMI

Source: China General Customs Administration, BMI

The official launch of Line C of the Central Asia-China gas

pipeline in June 2014 will see gas imports from Uzbekistan and
Kazakhstan continue to rise. Indeed, Uzbekistan's gas exports to
China grew almost 20 times, from 0.12bcm in 2012 to 2.33bcm in
2013. Given Uzbekistan's obligation to export up to 10bcm of gas
per year to China, we will see Uzbek gas exports continue to rise.
Kazakhstan will also ramp up exports to China in the coming years;
at 0.12bcm, Kazakh exports to China in 2012 represented only 2.4%
of average yearly contracted volumes.
This will be facilitated by first gas from the Shwe gas field in
Myanmar, which is to deliver 500mn cubic feet per day (about
5.11bcm per year) of gas to China via the pipeline under a 30-year
supply deal signed between Daewoo International and China
National Petroleum Corporation (CNPC).
Australia To See Short-Term Increase
Malaysia saw a strong rally in LNG exports to China, which more than

Projected Winners And Losers Of Chinas Gas Import Growth

Winners Losers
Short-Term Turkmenistan (Pipeline) Indonesia (LNG)
Qatar (LNG) Malaysia (LNG)
Uzbekistan (Pipeline)
Kazakhstan (Pipeline)
Myanmar (Pipeline)
Australia (LNG)
Long-Term Russia (Pipeline, LNG) Canada (LNG)
Tanzania (LNG)
Source: BMI

8 www.oilandgasinsight.com
China
doubled from 2012 to 2013. This saw its market share increase from
3% of total Chinese gas imports in 2012 to 7% in 2013. Meanwhile, as
we had projected, Indonesia's share in the Chinese market continued to
fall, from 8% in 2012 to 6% in 2013. This is a trend that will continue,
as a short-term decrease in LNG production limits Indonesia's ability
to hike exports abroad (see 'Chilly Prospects For LNG', March 21).
BP's 20-year supply agreement with China National Offshore
Oil Corporation (CNOOC) poses upside for Indonesia. The deal
could see up to 1.5mn tpa (2.04bcm) of LNG delivered to China via
the Tangguh LNG terminal. This could be see volumes increase from
2020 when the third production train of Tangguh comes online (see
'Supermajor Deals Reiterate High Market Growth Potential,' June
18). Nonetheless, the increase in volumes could still be too small
for Indonesia to increase its market share of China's gas market.
Gas Demand Encourages Both LNG And Pipeline
Imports
China Gas Imports By Type (LHS, bcm) & % y-o-y chg (RHS)
Source: China Customs General Administration, BMI
Among China's LNG import partners in 2013, Australian imports
saw the greatest growth from 1.06bcm in 2012 to 4.84bcm in 2013.
We note that this is just a correction from 2012's steep fall in Austral-
ian imports. Looking at the previous four years, 2013 still represents
the second-lowest level of LNG imported from Australia into China.
Chinas Boom, Exporters Gain
Qatar & Turkmenistan Gas Exports To China, 2012 & 2013 (bcm)
Source: China General Customs Administration
Nonetheless, this confirms our view that Australia will make
a small comeback in China's gas import market (see 'Gas Import
Boom: Winners And Losers', June 23 2013). This is particularly
from 2015, when the completion of several LNG export projects in
www.oilandgasinsight.com
Asia Oil & Gas
Australia Gorgon LNG, Queensland Curtis LNG for example will
kick into effect long-term supply agreements signed by China that
amounts to 15.9mn tonnes per annum (tpa) or about 21.6bcm in
2015 and 26.0mn tpa (35.4bcm) in 2016.
Growing Number Of Pipeline Partners
China Pipeline Gas Imports By Country (bcm)
Source: China General Customs Administration, BMI
This will result in a rebalancing of the LNG import mix with
China demanding less from the spot market. We expect a 37.6%
y-o-y increase in Chinese LNG demand between 2014 and 2015,
which is lower than the 71.2% surge seen in the period 2012-2013.
Countries that could be most affected by the reduction in Chinese
demand for spot supplies include the UAE, Peru and Algeria. Unlike
countries such as Yemen and Egypt, where LNG demand will be
sustained due to long-term supply contracts signed between China
and LNG producers BG, Total and GDF Suez, these countries will
be less shielded.
Pipeline Start-Up To Support Gas Flows
Myanmar Gas Exports To China (bcm)
Source: China General Customs Administration
Russia Pipeline Deal Changes The Game
We have previously noted that Russian gas could grow in importance
in China (see 'Gas Import Boom: Winners And Losers', June 23
2013). Indeed, our view has played out nicely, with CNPC's long-
term supply agreement with Yamal LNG and the 38bcm pipeline
gas deal sealing Russia's position in China's long-term gas market.
The Russian impact on the Chinese market will only be felt
after 2018 the expected date for first supplies from Yamal LNG
to flow into China and for pipeline gas supplies to flow from Russia
into China. China's continued gas consumption growth will prompt
9
Japan
more LNG imports between 2014 and 2018, providing short-term
opportunities for LNG producers. However, beyond 2018 we expect
a slight contraction in China's LNG import demand.
2013: Return To Normality
Australia Gas Exports To China (bcm)
Source: China General Customs Administration
Firms and countries with existing long-term supply contracts with
China will be shielded from the impact of Russian gas. However,
hopeful new entrants such as proposed LNG projects in Australia
and Canada will see fewer opportunities in China.
Increasing LNG Demand, But Less Spot
Opportunities
China LNG Imports, 2009-2018
f=BMI forecast. Source: China General Customs Administration, BMI
China would also be a less attractive market for planners of
Tanzania's LNG export project. Unlike its Mozambican competi-
tor, which enjoys equity participation from CNPC, it could be more
difficult for the Tanzanian LNG project to secure Chinese contracts
to support the plant's construction.
10
Asia Oil & Gas
Japan
Gas Pipeline Hopes To
Replicate China Price Success
BMI View: Renewed Japanese interest in a Russia-Japan gas
pipeline comes on the back of China's gas deal with Russia, which
most likely saw China benefit from a slightly lower gas import price.
Japanese lawmakers pushing for the pipeline are likely looking to
Russian gas as a cheaper alternative to LNG. However, Japan's
status as one of the US' most important security allies in the region
could impede the progress of a Russo-Japanese gas deal.
Looking To Halve Gas Import Prices
Comparison Of Selected Gas Import Prices (USD/mnBTU)
Source: Japan METI, China General Customs Administration, Bloomberg, BMI
Japanese lawmakers could push Prime Minister Shinzo Abe to
rekindle talks to build a gas pipeline from Russia's Sakhalin Island
to Japan's northern-most prefecture, Hokkaido, during the Prime
Minister's summit with Russian President Vladimir Putin in Q3 2014.
Bloomberg reports that 33 lawmakers, led by Naokazu Takemoto,
will present a proposal to kick-start the project, which will see the
construction of a 1,350 kilometre (km) pipeline that could deliver
up to 20bn cubic metres (bcm) of gas or about 17% of Japan's
total gas consumption in 2013. The group estimates the project to
cost USD6bn and to take about five years to complete. Takemoto
is part of Prime Minister Abe's Liberal Democratic Party (LDP).
In 2013, Japanese firms Tokyo Gas, Japex Corporation and
Sumikin Engineering Co were reportedly looking into the pipeline,
which could see gas transported as far south as Japan's Ibaraki Pre-
fecture. However, none of the companies confirmed their interest.
An Eye For Cheaper Gas
Japan's renewed interest in the pipeline comes on the back of the
38bcm Sino-Russian gas deal, signed on May 23. Although the
terms of the deal have not been disclosed, it is likely that China
will pay prices in the range of USD350-380 per thousand cubic
metres (USD9.91-10.78/mnBTU) for Russian gas. This is less than
what China currently pays for both liquefied natural gas (LNG) and
pipeline gas imports.
Japan meets all of its gas demand via LNG imports. In 2013, it
imported about 122.1bcm of gas in total or about 90mn tonnes
of LNG. As shown in the chart below, Japan may be able to halve
its gas import bill if it buys Russian gas at a similar price to that
agreed by the Chinese.
Savings on gas imports will be significant for the Japanese economy.
www.oilandgasinsight.com
Indonesia
Japan's industry has bemoaned the country's high electricity prices,
which has hit the country's competitiveness despite Prime Minister
Abe's policies to stimulate the economy. While deliberate moves to
devalue the yen were meant to boost Japan's export competitiveness, it
also increased the cost of US dollar-denominated LNG imports that had
largely powered the country since the March 2011 Fukushima crisis.
Security Risks With Greater Dependence On
Russian Gas
Japan Gas Consumption (bcm)
e/f=BMI estimate/forecast. Source: EIA, BMI
Although Japan is in the midst of restarting nuclear energy pro-
duction, tougher nuclear regulations could put half the country's
nuclear plants out of operation permanently. This will help keep gas
plants in operation and support gas demand. Northern Japan, which
was most exposed to the Fukushima crisis and where the nuclear
stigma remains strong, will likely remain reliant on gas to meet its
power needs. Thus, Russian pipeline gas could be both economically
and political palatable for Japan.
Making A Good Deal
At 20bcm, the USD6bn pipeline could cost slightly more than build-
ing seven LNG receiving terminals that can each process 2.1mn
tonnes per annum (tpa) of LNG (about 2.9bcm), using Inpex's
Naoetsu terminal in Joetsu as a reference. However, the higher
fixed investment cost will be more than compensated by cheaper
gas supplies.
Such a deal would be much welcomed by Russia; in fact,
Gazprom had primarily targeted Japan as investment partners and
an export market for its planned Vladivostok LNG project, though
private Japanese firms had not been forthcoming in lending Gazprom
its support.
However, we note that a possible downtrend in LNG prices
could eradicate some of the price attractiveness of Russian gas.
Moreover, as a security ally of the US, there are risks involved
for Japan to depend on Russia for nearly 20% of the country's gas
consumption needs.
The security implications of a large pipeline gas supply deal with
Russia could be the bigger stumbling block in the conclusion of a
gas deal. We expect the US to react should Prime Minister Abe's
cabinet decide to proceed with the Russia-Japan pipeline project,
which could prompt the US to speed up its LNG export approval
process to avoid swinging one of its most important allies in Asia-
Pacific towards Russia. While this will not stop the deal, it will slow
the progress of a possible Russo-Japanese gas agreement.
www.oilandgasinsight.com
Asia Oil & Gas
Indonesia
Cost Challenges For Industry
Cooperation
BMI View: Indonesia will benefit from South Korean investment
into its gas infrastructure development. However, advancing coal-
bed methane (CBM) cooperation and a joint synthetic gas (syngas)
project could face short-term cost challenges.
Gas Growth Prompts Infrastructure Expansion
Indonesia Gas Consumption, 2012-2023 (bcm)
e/f= BMI estimate/forecast. Source: BPS, EIA, BMI
The South Korea-Indonesia Energy Forum set the stage for greater
Korean involvement in Indonesia's energy industry. Attended by
some of Korea's largest energy players such as Korean Electric
Power Corporation (KEPCO), Korean Gas (Kogas), POSCO
Energy and SK E&S, two preliminary agreements for gas coopera-
tion were signed:
Floating storage and regasification unit (FSRU) terminal in
Indonesia. Korea will conduct a joint feasibility study with
Pertamina for the development of the unit, to be based in
Indonesia.
Gas infrastructure development. Pertamina and SK E&S
will study gas technologies and infrastructure to be applied
to Indonesia.
Other key points of discussion include joint study and devel-
opment of Indonesia's coal-bed methane (CBM) sources and the
construction of a large-scale synthetic natural gas (syngas) plant in
Indonesia that can produce up to 1.2bn cubic metres (bcm) of gas per
year. The syngas plant may cost up to KRW100bn (USD97.4mn).
South Korea also expressed interest in Indonesia's geothermal and
biogas potential.
Much Needed Help For Gas Infrastructure
South Korea's assistance will be valuable in developing Indonesia's
gas infrastructure. We have pointed out that the latter's growing gas
demand, particularly as it seeks to switch from diesel to cheaper
sources for power generation, will require much work to connect
supplies to the market (see 'Chilly Prospects For LNG', March
21). Currently, much of the investment is being undertaken by
state-owned Pertamina and PLN. However, the two firms are also
involved in other billion-dollar investments new refineries to
expand the country's downstream capacity for Pertamina, and the
11
Indonesia Asia Oil & Gas

development of power plants for PLN. South Korea's participation 2012, ExxonMobil pulled out of its CBM venture in 2013.
in gas infrastructure projects will benefit the firms, relieving their Moreover, Australia's problems in stabilising CBM produc-
capital expenditure burden while enjoying the engineering expertise tion which has contributed to supply scares for CBM-fed
the Koreans would bring to these projects. LNG projects demonstrate the considerable operational
risks of CBM output even for a country with proven CBM
Syngas Price Needs To Beat LNG Alternative resource potential (see 'Second Purchase Agreement Points
US LNG Export Price Forecast To Production Challenges', December 20 2013).

Inching Into Growing Coal Gasification

Korea's plan to advance cooperation with Indonesia for syngas
production confirms December 2013 reports that KEPCO via its
subsidiary KEPCO-Uhde was in discussions with PLN for a coal
gasification plant in Bekasi, West Java. Gas produced will supply
PLN's power plants. It was then reported that the companies could
begin development by late 2014 and begin operations four years later.
The firms are reportedly looking to Indika Energy, Bukit Asam and
Arutmin Indonesia for coal supplies, as well as additional equity
partners in the project.

Challenging Coal Talks Ahead To Feed Project

f = BMI forecast. Source: BMI Indonesia Coal Price Reference

The likely election of candidate Joko Widodo (Jokowi) as presi-

dent in Indonesia's upcoming elections in July 2014 provides prom-
ising returns for South Korean investors. Policy uncertainty, poor
business environment and a misallocation of government finances
underline our Infrastructure team's subdued outlook on Indonesia's
construction industry. However, our Country Risk team expects a
Jokowi-led administration to improve the macroeconomic picture
and spur infrastructure development as part of his economic policy
(see 'Jokowi Victory To Carry Infrastructure, Mining and Oil &
Gas Upside', April 8). A more investor-friendly environment and
strong domestic gas demand will support gas infrastructure projects
in the country.
NB: Official reference price for May 2014. Source: Bloomberg, MHI

Less Upbeat About CBM

Indonesia's CBM sector could be less attractive for South Korean
firms in the short term, however. In 2012, Kogas signed a memoran-
dum of understanding (MoU) with Medco Energi to develop three
CBM blocks Sekayu, Muralim and Lematang in South Sumatra.
However, there has been little progress since.
CBM cooperation will likely be slower to take off for the fol-
lowing reasons:
Kogas' constraints: Kogas has been looking to reduce its
upstream involvement in gas projects in order to control
the firm's debt. Having cut its stake in Shell's LNG Canada
project, Kogas had looked to sell its 15% interest in Aus-
tralia's Gladstone LNG before withdrawing this decision in
February 2014. The Korean firm has been less aggressive in
acquiring upstream assets in 2013 and will likely continue
to practise caution.
CBM risks: While Indonesia's CBM potential could be
great, the risks of CBM production remain high and could
deter investors looking for immediate gains. Despite hav-
ing expressed optimism in Indonesia's CBM potential in
Intergovernmental support provides additional backing to the
syngas project. However, we note that project economics may still
prove challenging. In a 2011 feasibility study for an Indonesian
syngas plant, Mitsubishi Heavy Industries (MHI) concluded that
coal prices would have to be around USD13 per tonne for the gas
produced to be sold at about USD10 per mn British Thermal Units
(mnBTU). This is close to the price we estimate US LNG to cost in
2018, which is the alternative to syngas consumption in Indonesia
(see 'Further LNG Contract Opportunities Ahead', April 28).
Coal gasification projects use lowest quality brown coal, which
would mean that feedstock will likely cost less than the USD40.61/
tonne that Indonesia's lowest tradable grade coal was sold at in
May 2014.
However, KEPCO and PLN will have to exert considerable pres-
sure on miners to bring down the cost of brown coal supplies for
syngas to be competitive with LNG imports. A long-drawn negotia-
tion process could see a delay in the syngas project's construction.

Analyst: Marina Petroleka, Shun Ling Yap, Emma

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