Cheap gas to rival coal in Asia

Coal faces increasing competition from natural gas in power generation in Asia, as prices for the cleaner-burning fuel are expected to stay depressed, energy consultancy Wood Mackenzie said on Tuesday.

Asian liquefied natural gas (LNG) spot prices have halved in the last six months to multi-year lows near $7 per million British thermal units (mmBtu) due to weak demand LNG-AS.

“We do not forecast any sustained price recovery above $10 per mmBtu with over a 100 million tonnes per annum of new LNG expected to be operational by 2020,” said Graham Tyler, research director for Asia gas and power at Wood Mackenzie.

“This looming supply glut will create an environment where coal versus gas competition in Asia is a real possibility,” he said.

Coal futures dropped to 9-year lows this week after a short-lived rally earlier in the year, forcing many miners to produce at a loss. As such, coal prices are unlikely to fall much further, according to the consultancy.

Thermal coal currently accounts for about half of all power generation across Asia, with natural gas making up only 11 %, according to Wood Mackenzie.

Environmental concerns and the introduction of carbon trading schemes will favour more gas burning in China and South Korea, while Malaysia is also expected to increasingly turn to gas amid delays to construction of new coal-fired power plants and an oversupply of domestic gas, Wood Mackenzie said.

The consultancy forecasts power demand in Asia to grow 5 % per year on average to 2030, which will require an additional 2,000 gigawatt of power capacity.

“Portfolio rationalisation is oriented towards survival and restructuring – buying assets is not part of the discussion,” said Philip Whittaker of the Boston Consulting Group. “And even if there was appetite, the management bandwidth to get this done is very limited.”

For the older assets, the problem remains one of decommissioning costs, said Andrew Moorfield, Europe-based head of origination at Canada’s Scotiabank: “Decommissioning is no longer 20 years away, but in some cases only five years away.”

However, when oil prices were higher, there was less incentive to come to an agreement on price. Now some deals that were on hold are starting to move forward, said Neil Leppard, a director in the energy deals team at PwC.

“It’s harder for the sellers to sit back and do nothing – when capital is more restricted, the focus on where you deploy it becomes more important to the board,” he said.

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