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Asia can copy U.S. coal-to-natural gas switching

Can Asia replicate the coal to natural gas switching that has revolutionised power generation in the United States?

Up to now the conventional thinking has been not really, given that coal remains cheap and abundant in the region, while natural gas is more scarce, expensive and difficult to transport.

But factors are at work that suggest several Asian countries may be able to use more natural gas for power generation, and at prices that are still competitive, albeit higher than sticking with coal.

The main reason is that natural gas is in the process of becoming significantly cheaper in Asia, which used to pay more than double what buyers did in Europe and almost five times more than consumers in the United States.

U.S. natural gas prices have plummeted in the past 10 years, from above $15 per million British thermal units (mmBtu) in 2005 to $2.536 on Monday, largely as a result of the output bonanza from the shale revolution.

While not quite as spectacular as the drop in the United States, Asian prices are also falling, and are likely to decline more.

While there is some shale development happening in China and Australia, the main reason is the surge in supply of liquefied natural gas (LNG), the super-chilled fuel that is the standard way of moving natural gas around Asia.

Spot Asian prices LNG-AS were $7.10 per mmBtu last week, down almost 30 percent so far this year and about one-third of the record $20.50 reached in February last year.

While a milder than usual winter in North Asia was partly behind the slump in regional LNG prices, the more compelling reason is the start-up of the first of a slew of giant LNG projects in the region.

Exxon Mobil commenced shipments from its 6.9-million tonne a year Papua New Guinea plant last year, while BG's Queensland Curtis venture loaded its first cargo in December, the first of seven new LNG projects in Australia to start up.

The seven Australian projects will add 62 million tonnes per annum, while four under construction in the United States will deliver a further 48.5 million tonnes, and Russia's three plants being built will add another 41 million tonnes.

To put this into context, about 150 million tonnes of new capacity is under construction and all of it should be up and running by 2020.

Japan, the world's largest LNG buyer, imported 88.5 million tonnes last year, while China, the great hope for increased demand, imported 19.8 million tonnes.

POTENTIAL ASIAN GAS-FIRED BOOM

The United States is a decade into the shale gas revolution, the LNG revolution is just getting started in Asia, but already the price impact is being felt.

Coal-fired generation in the United States accounted for 39 percent of its total electricity production last year, down from 53 percent in 1997, while the share of natural gas rose to 27 percent.

It's true that in the United States natural gas has become cheaper than coal to burn for many utilities, and given the country's largely deregulated power sector, this is the main reason for the coal-to-gas switching.

In Asia the same isn't quite the case, at least not yet.

At current prices LNG is still more expensive in Asia than coal, but the gap has been narrowing.

One tonne of anthracite coal provides approximately 22.58 mmBtu of heating value when burned in a coal-fired plant, according to data from the U.S. Environmental Protection Agency.

With Newcastle coal, the benchmark Australian power station anthracite, at $58.13 a tonne last week, this implies a cost of about $2.57 per mmBtu, which is considerably less than the spot price of LNG.

Even though LNG prices are likely to fall in coming years as the new supply arrives, it's still doubtful that LNG will become as cheap as coal for Asian generators, unless coal prices recover strongly.

But to dismiss the chances of natural gas displacing coal on a cost basis alone would be failing to take other factors into account.

First among those is that natural gas prices are falling, meaning that even though the fuel may be more expensive than using coal, it's still significantly cheaper than it was a little over a year ago.

The fall in natural gas prices appears structural and has further to run, while coal prices are probably as close to as low as they can go, with further declines likely to spark mine closures.

This means that governments and utilities contemplating gas-fired power plants are facing lower costs than they were in recent years.

Gas plants are also about a third of the price to build than coal-fired equivalents, and are also likely to be easier to finance given the increasing opposition of banks and other lenders to finance the more polluting fuel.

Pollution is also likely to play a major role, especially in China where the government has made it clear it wants to limit coal consumption and increase the use of natural gas and renewables.

Cheaper LNG will help power this transition, as it removes some of the high-cost hurdles that existed up until the recent price declines.

While coal-fired power may still be cheaper to run in Asia, it's more expensive to build and comes with environmental and social issues that governments are increasingly keen to avoid.

source: http://in.reuters.com