Gas Co-operation in Northeast Asia:
Issues and Institutional Barriers
Xavier Chen
VP, Gas&Power and Regulatory Affairs BP China
Seoul, 17 March 2004
Northeast Asia Gas Co-operation:
What does it mean?
• Pipeline gas from Russia to consuming countries
• LNG projects:
• 3 world’s largest LNG importers (Japan, Korea, Chinese Taipei)
• Competition by other LNG importing sources
• Pipeline gas versus LNG:
• Complementarity of LNG with pipeline gas
• Problems caused by the varying degrees of maturity between LNG market and pipeline gas market
• Focus on pipeline gas projects
Competing Gas Supply Sources
GDLNG
Y-13
E. China Sea Kovykta
Sakhalin
Japan S. Korea
E. China N. China
N.E. China Tarim Basin
W. Siberia Gas
Central Asia Gas
Ordos Sulige
Chayandan
WEP
WEP
LNG
LNG Planned infrastructure
Possible infrastructure Existing infrastructure
Current LNG supply Future LNG supply
S. China
LNG
Specific Features of Cross-border Pipeline Gas Projects
• Gas pipeline different from oil and power projects
– Gas has no captive market, a demand driven project – High transportation cost
– Stringent links between segments of value chain through e.g Take-or-Pay contract
– Synchronisation of investment, particularly downstream end-user projects with the pipeline completion schedule
• Cross-border gas pipeline different from domestic pipeline
– International trade and transit
– Multiple players and regulatory regimes
Conditions for Long-distance Gas Pipelines
Chapter 7
Issues Surrounding Long-Distance Gas Pipelines
Highlights:
•Building a long-distance pipeline is an important challenge in all parts of the world. It is particularly so in an emerging gas market such as China. Two of the main preconditions are a sufficiently large paying demand and adequate gas reserves. Once these preconditions are met, the most critical success factors are the alignment of the interests of all the major players and a well- balanced risk-reward allocation among the players.
•The key short-term issue for …
General Conditions for Long-distance Gas Pipelines
• A sufficiently large base of paying demand
• A sufficient level of reserves
• Risk sharing and mitigation mechanisms
• A facilitating investment regime
Gas Demand Growth in North East Asia
0 50 100 150 200 250 300 350
N.
America
Europe Asia
Incremental Demand (bcma)
1-2%
CAGR
2.7%
CAGR
5%
CAGR
Japan Korea China
Taiwan
0 50 100 150 200 250 300 350
1992 2002 2020
Total Demand (bcma)
Incremental Demand 2002 - 2020 Total Demand 1992 – 2020
Strong Growth - double the global average in gas
Strong Growth - double the global average in gas
East Siberia – A World Class Gas Resource
Irkutsk
Kovyktinskoe
Lake Baikal
0 200 km
Lena R.
Angara R. Yarakta
Markovo
Dulismin Sobinskoe
Paygin
Verkhnechonskoye
Danilov Talakanskoe Chyandinskoe Yurubcheno-Tokhomskoe
Tympuchikan
Bratskoe
Bysakhtakh
Ayan
Atovskoe
Gas Oil
World class basin potential East Siberia resource base:
Oil: 2.9 bln tonnes Gas: 29.9 tcm (1000 TCF)
0 20 40 60 80 100 120
2004 2006
2008 2010
2012 2014
2016 2018
2020
Production bcm/a
Kovykta Chayandin Bratskoe Sobinskoe Yurubcheno Other
Production of 100bcm/a by 2020 Production of 100bcm/a by 2020
Pyeongtaek Beijing
Changchun Manzhouli
Kovyktinskoje
: 4 bcm/a
8 bcm/a
12 bcm/a
10 bcm/a
Kovykta Gas Project is a Concrete Start
4 bcm/a 2006-8
Irkutsk
10 bcm/a 2008
Korea
8 bcm/a 2013
North China
12 bcm/a 2008
North East China
Plat. Sales Gas
First Gas Market
$10bn – 12bn Pipeline
$15bn - $19bn Total
$5bn - $7bn Upstream
IFS Estimate Component
1900 GIIP bcm
23 years Plateau Period
9 years Build Up Period
1500 Reserves bcm
RUSIA Market
Development Capex $bn
Sales Gas (bcm/a)
Reserves bcm Kovykta-Manzhouli
1943 km
Manzhouli-Shenyang 1427 km
Shenyang-Beijing 649 km
Dalian-Pyeongtaek 536 km
Total length of pipeline 4887km
Shenyang-Dalian 332 km
9
Transit Country Consuming Country
Re-Export Off-taker
Producer Country
Countless Number of Issues
E&P policy and export policy
Investor climate
Commercial regime
Partnership
Local supply
HSE
Export arrangement
Main agreements
Market characteristics
Business model
Pricing
Distribution arrangements
Regulatory policies
Environmental policies
HSE
Sales agreement
Other main Agreements
Construction/operation regime
•Rights of way and permits
•Taxes, duties, VAT
•Financing
•Tariffs
HSE
Supply to local market
All Kinds of Risks You Can Name…
Financing
Regulatory
HSE Market
Currency
Political
Legal Upstream
Price Contract
Construction Technical
Fiscal
Volume Commercial
The key is not the existence of risks, but the availability of means to mitigate risks
Credit
Supply Completion
Country
• Key Challenge:
– Building a robust demand base
• Key Requirements:
– A clear and stable investment regime – A facilitating institutional framework – An enabling energy policy
The Key Challenge and Requirements
• China:
– Greenfield downstream sector, requires largest investment and patient education
– Challenge is developing end-use market in a coal-dominated world
– Anchor market for large volume pipelines
– Need strong policy drivers
• Korea and Japan:
– Competition from long-distance LNG projects – Impacts of regulatory change on LNG models
– Impacts of evolving LNG models on the pipeline projects
Building a Robust Demand Base
• Respect commercial principles
• Provide long-term legal and fiscal stability
• Allow rate of return commensurate with risks
• Easy access to financing sources
• Effective legal protection
• Administration neutrality
• Regulatory transparency and stability
• Freedom on commercial decisions
• etc…
A Clear and Stable Investment Regime
A Facilitating Institutional Framework
IEA
UN/ESCAP APEC
ASEAN + 3
Energy Charter Treaty IEF
KEDO
Energy Dialogue Bodies Covering Northeast Asian Countries
• Lack of multilateral approach to energy policy in countries of the NEA ;
• Many existing major energy dialogue bodies touch the region by a long arm;
• Need to improve energy policy dialogue between countries and among them;
• “NEA Energy Community” needs a strong political will and concrete steps;
• A strong political commitment and an enabling national energy policy to underpin investor’s confidence in all countries
A Facilitating Institutional Framework
(continued)
• Common energy policy drivers:
– Supply diversity and security in consuming countries meet the needs of export diversity in Russia
• Specific country drivers:
– China: “Revitalize the Northeast Industrial Heartland”
– Russia: “Developing the East”
• Energy policy approaches:
– Unilateral, bi-lateral or multi-lateral?
– Competition or co-operation?
– Role and place of Russia in the consuming countries’ energy plans – Link between gas projects to oil projects
An Enabling Energy Policy
Northeast Asia Gas Co-operation:
Energy Policy Challenges for the Whole Region
