Good morning. My name is Medan Abdullah, managing director of Gazprom Marketing & Trading

15 Pages·2014·1.88 MB·English

by  France Lee

Good morning.

My name is Medan Abdullah, managing director of Gazprom Marketing & Trading Singapore. I would like to
thank the organisers of this conference for inviting me to speak here today to the esteemed audience of
the 8th Asia LNG Summit.

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Before we begin, it is customary for us to share a disclaimer statement – one of the necessary evils of
working in a business environment that is ever evolving, sometimes at a pace that surprises even an
industry veteran like me.

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I doubt there are many here who will not have heard of Gazprom in the last week or so. Nevertheless,
please allow me the privilege of speaking to you briefly on our parent company and the subsidiary I lead.
Gazprom holds the world’s richest natural gas reserves, with 17% of global and 70% of Russian gas
reserves. Its 169,000 kilometres of pipeline is the largest gas transportation system in the world and plays
a strategic role in Russia’s domestic gas distribution and export supplies.
Gazprom ranks as one of the most profitable companies globally, providing jobs for over 400,000
employees worldwide, who work across the entire oil and gas value chain.
Its variety of operations is matched by its global presence.
As you can see, Gazprom is involved in all aspects of the oil and gas industry, including geological
exploration, production, transportation, storage, processing and sales of gas, gas condensate and oil, sales
of gas as a vehicle fuel as well as generation and marketing of heat and electric power.
Its strategic objective is to maintain its global energy leadership position by diversifying destination
markets, increasing reliability of supplies and enhancing efficiency of operations.
This means not only increasing market share in Europe in the long-term, but putting a growing focus on the
Asia Pacific region and the LNG market.

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In 1999, Gazprom Marketing & Trading was set up in London to manage Gazprom's marketing and trading
activities in the liberalised markets of Europe. GM&T is headquartered in London, and has offices in
Singapore, USA, France, Germany, Switzerland and the UK.
In 2009, a Singapore subsidiary was set up. We initially focused on LNG trading based on a Sakhalin Energy
contract we marketed into Asia Pacific.
As we developed direct relationships with the region’s buyers and traders, we diversified our trading
business, building up a third-party portfolio, and are now a platform not just for LNG trading and marketing
but also shipping and logistics, and trading in LPG.
To date, GM&T has delivered over 140 cargoes and GM&T Singapore today actively trades across India,
Japan, Australia, South Korea, Taiwan, China, Malaysia and Thailand.
These trading deals are important as they allow Gazprom to develop an intimate understanding of the LNG
market, particularly in our region, where LNG demand is the highest worldwide. They provide a solid base
and sets Gazprom up nicely as an important supplier of LNG for the long term.
In recent years, Gazprom has made clear its ambition to expand its footprint into Asia. Just last week, a
landmark deal was signed, the largest in Gazprom’s history, to supply 38 billion cubic metres of gas
annually for 30 years to CNPC.
Our CEO, Alexey Miller, said on the occasion that this is the start of a fascinating story of Russian-Chinese
cooperation, with many more essential chapters yet to be written.
Gazprom has also spoken often on its plans to increase its share of the global LNG market.
Both these aspirations are a perfect complement and I would like to take the next few minutes to share
with you some of our views of the Asia Pacific LNG market. I’ll go briefly through the established news and
traditional flows of the gas and LNG market before coming back to focus on what is changing in this
market.
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To begin, demand for natural gas is expected to grow fastest of the fossil fuels at around 2% annually. This
is driven by continued economic growth and increasing gas penetration in newer gas markets, particularly
in non-OECD Asian countries, partly for environmental reasons.

Even with the expanding role that Renewables will play in global energy consumption, by 2030, natural gas
will account for 23% of the world’s energy consumption.

More significantly, forecasts predict that Asia will account for 25% of natural gas consumption by 2030.
The LNG market is forecasted to grow even more quickly, at around 5% annually, than the overall gas
market as countries look to enhance security of energy/gas supply, and significantly, as more LNG supply
comes onstream later this decade.
A unique characteristic of the gas trade in Asia Pacific is the limited amount of natural gas that is traded via
pipelines and the region’s growing dependence on LNG.
Though pipeline and LNG competition may exist in some markets, particularly in China, fundamentally
there is a need for both.
Both long-standing Asian LNG buyers – the big traditional importers such as Japan, South Korea and Taiwan
– as well as “new” LNG importers – particularly the Southeast Asian markets – will underpin LNG demand
growth in the region.
Let’s take a look at the markets in Asia in greater detail.
In North Asia, demand in the traditional LNG import heavyweights of Japan and South Korea remains high.
These markets will continue to hold their leading position in the global LNG market, largely as a result of
limited environmentally sound alternatives.
Japan’s Nuclear Regulation Authority (NRA), established in September 2012, has been reviewing the
nuclear power plants for restarting based on a new set of safety standards.
The challenges facing all aspects of Japanese nuclear industry are well known, be it restarts, new builds or
even decommissioning. LNG continues to be a reliable source of energy, competing effectively with other
liquid fuels.
LNG demand in South Korea, currently the world’s second largest LNG market, will also remain robust as
the country continues to face uncertainty over its nuclear power plant restarts.
In China, the government’s goal to increase gas usage, due to environmental reasons, as an important part
of its 12th Five-Year Plan is a positive for the gas and LNG market.
Even with Gazprom and CNPC’s recent agreement for pipeline gas supply, we still expect to see a big
growth in LNG demand in China.
China’s LNG imports could rise to 30 MTPA by 2015 and we believe Chinese demand will increase even
more significantly from 2016.
Unconventional gas’ impact on the market in the future is still unknown as progress has been slow but
consensus expects unconventional gas to become an important contributor to domestic gas production
post-2020s, if technical and environmental challenges can be overcome.
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The newest player in the LNG market, and probably one of the most interesting given its challenges and
diversity, is Southeast Asia.
New LNG markets of Indonesia, Thailand, Malaysia and Singapore are currently importing and, in the
medium to longer term, will be supplemented by Vietnam and the Philippines.
Domestic gas demand in Indonesia and Malaysia is outstripping domestic supply, forcing these countries to
turn to LNG imports.
At the same time, exports are decreasing, so reuse of liquefaction facilities is being considered.
Gas demand from Thailand will also increase significantly post-2020. Certainly beyond what can be
supplied by domestic production and pipeline imports as government policy decisions limit the number of
coal-fired power generation.

In summary…
By 2025, demand for LNG in AP will increase by around 150 MTPA to surpass 320 MTPA, accounting for
more than 70% of global LNG demand, which is estimated to reach around 450 MTPA.
Returning to the theme of change of today’s session – what is changing on the demand side in the Asia
Pacific region?
We can see a general trend of demand uncertainty in the established markets, created by evolving national
energy policies affecting both power generation and market structure and a far greater emphasis
competitive on energy prices nationally.
For many years now North Asia has been regarded as the premium market for LNG and there seemed to
be a tacit acknowledgement that being the premium market was a price worth paying for receiving a
premium (i.e. reliable) supply.
We can see national policies developing that reflect a change in this view. The Japanese government has
been outspoken about the need to purchase LNG more competitively and is looking at a number of ways
to achieve this.
Japan is looking at the idea of a LNG buying consortium with the objective of diminishing perceived
competition between Japanese buyers that they believe has driven up prices.
We are not sure we would agree with the assessment, and indeed given that Japan is also seeking to
liberalise their power and gas markets, one could argue that this latter step will generate sufficient
incentive for competitive purchasing without creating a consortium on the buy side.
Japan is also keen to promote more transparency in pricing and has recently started to publish the spot
prices paid for their supplies.
Over the last few years we have seen the growth of the short-term/spot supply market – to the extent that
Asian buyers are now coming to rely on this short term market for some of their base demand, instead of
relying exclusively on long term transactions to meet such demand as they did in the past.
This does not diminish the fundamental requirement for the secure supply of LNG, but rather creates a
new pattern of contracting, the full impact of which is yet to be known.
We are also starting to see cooperation between LNG buying countries to provide each other with support
and this broader view of the market-place is also reflected in a growing desire of buyers for greater
flexibility in their supplies.
Indeed, another potential source of change would be the development of a regional trading hub and
greater price transparency as paper markets develop.
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I will move on now to the supply side and then reflect on the changes there.
Will supply keep up with the world’s, and particularly Asia’s, unrelenting demand for LNG?
This LNG demand will be supplied by both operational liquefaction projects, and those currently under
construction, until 2018. Post-2018 new LNG supplies, from liquefaction projects that have not yet been
sanctioned, will be required to meet demand.
2013 saw the highest amount of new LNG supply capacity reaching FID since 2005 – almost 30 MTPA of
new LNG supply was sanctioned.
Much of the new yet-to-be-sanctioned LNG supply will be imported from new areas or new resources for
LNG production such as East Africa, the Russian Arctic and unconventional gas from North America and
Australia.
So what is significant about these new sources of supply?
Looking first at Australia, while it is often quoted that Australia will become the largest producer of LNG,
overtaking Qatar, it is important to note that in Australia there are a number of unconnected projects, each
seeking their own place in the market.
In Qatar, there is a common majority shareholder in all of the producing projects which enables a more
coherent approach to marketing that LNG. We should not expect the significance of Qatar as a flexible
LNG marketer to diminish in the face of Australian supply growth.
Moving on to the US – supplies from the Gulf Coast can be seen as another major change to the LNG
supply pattern in the future. I will not dwell on this here other than to mention the impact on pricing.
Supplies from the US are priced on a cost plus basis with a reference to a gas price index at a remote (from
Asia) physical gas hub in Louisiana.
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While there may be times that this looks attractive compared with oil indexed prices, it is important to
remember that there is no scope for price review in a cost plus system where the fixed cost is incurred up
front.
There remains considerable uncertainty as to what extent the various LNG projects with significant
volumes of proposed LNG export capacity will eventually reach FID and supply Asian LNG demand, but
what we do believe is that oil-indexed LNG sales contracts are here to stay.
Many developers outside the US will be looking for predominantly oil-indexed prices. We also believe that
Asian buyers have a limit to the exposure they would want to Henry-Hub linked prices, meaning that the
demand for oil indexation will continue for the balance of their supply.
For sellers, the requirement is to secure a significant proportion of long-term contracted demand at viable
and predictable prices before making the massive investments required for LNG projects.
For buyers, there continues to be a requirement for a majority of their supplies on a long-term basis, but
there is a willingness to rely on short-term supplies to some extent and also contract on a variety of indices
while continuing to seek geographic supply diversity.
The interdependency between seller and buyer has been the cornerstone of the LNG industry in the past
and will continue to be so in the future.
Gazprom’s intention to increase its presence in the global gas market will be achieved through an optimal
mix of pipeline gas and LNG deliveries and notwithstanding the recent news of pipeline sales into China,
LNG is the main focus of that effort in the Asia Pacific.
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