LNG for the Philippines?

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Mike Wootton

Liquified Natural Gas (LNG) is a big business that needs deep pockets. Does the Philippines need LNG? Yes, it certainly does, unless it wants to stick with coal-fired power, or go for the attractive but very difficult to put into place nuclear option.

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Despite the rash of coal-fired power generation development and statements that say; “but there is no other option”, coal is not the long-term solution. It is dirty, it is mostly imported, and prices are volatile, albeit it does produce cheaper power [not cheap, but cheaper!].

Luzon hosts gas-fired power generation of over 3,000 MW, fed by natural gas from the Malampaya/Camago field offshore Palawan, Block SC38. This supply is far from infinite and there is little other successful exploration that would introduce additional natural gas resources. The SC38 block holds about 2.8TCF [trillion cubic feet]of gas and produces at a rate of 500mmscf/d [million standard cubic feet per day]. It will soon be fully depleted.

It is not practicable to convert a gas-fired power plant to coal-fired but they can run on liquid fuel. The quantities of liquid fuel needed to replace natural gas are so huge as to be impracticable to store. An alternate source of gas is, therefore, needed to maintain the operation of the 3,000 MW plants, which make up 32 percent of Luzon’s total generation capacity.

LNG is the obvious answer. The Philippines is in a part of the world governed by the pricing of the “Japanese Crude Cocktail”. The Japanese Crude Cocktail [JCC] is the average price of customs-cleared crude oil imports entering Japan. As Japan is a long way from the main oil exporting countries and is a major importer, the prices are high but, nevertheless, the JCC forms the benchmark, not only for oil but also for long term LNG pricing in Asia Pacific. To get an idea of just how high the JCC prices are: back in 2010 the JCC price for LNG was $11.00/mmbtu and the gas price in the US was $4.25/mmbtu and in Europe $6.80/mmbtu. But recently the JCC LNG price plummeted; it is now hovering between $5/mmbtu and 6/mmbtu.

The fortuitous combination of a low LNG price and the Philippines’ LNG need is with us. So you would think now is the time for people to start developing LNG regassification import facilities. There has been quite a lot of talk about this for some time but things have not progressed too far. The Philippines is a small market to LNG sellers, about 2 million tons a year, which, combined with the historic high price levels, did not stack up too well as a commercial investment proposition. But endeavours like this take quite a long time to mature and require investors with confidence in the future stability of the Philippines, as well as experienced developers to put it all together, not least fighting through an as yet developing set of bureaucratic requirements.

There are those who might say that the responsibility for developing LNG importation facilities is a job for government, and pre-EPIRA, such a development would have been done no doubt by the National Power Corporation. A multi-user import facility would have been available on an open user basis to all who desired LNG and could be put up as a government initiative to support clean power. But we are in a post-EPIRA privatized world where all such development is subject to investor confidence and potential returns [and competitiveness]indicating the likelihood of a need for several smaller LNG import facilities missing out on the benefits of any economies of scale.

It is a “no brainer” that LNG will come to the Philippines for main power generation, and even potentially, later for other uses such as vehicle fuelling and distributed power generation. The unfortunate part about this is that the Philippines will still be subject to the vagaries of the international oil market, for it is to that that LNG prices are linked. Wouldn’t it be good to find some more indigenous natural gas that could be produced and piped to power plants?! But for that, people need to invest in yet more exploration of the Philippines and its diminishing offshore areas.

Mike can be contacted at mawootton@gmail.com

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