Natural Gas Investment Opportunities in Asia

David Gray

ver the past 30 years, Asia has experienced 0 prolonged economic growth at rates unri- valed by any other region of the world. Since the 1970s, this economic expansion has driven Asian energy consumption upward by more than 300 percent, and by 2010 an additional 200-percent increase is forecast. Currently, demand for natural gas is growing faster than any other fuel source and is estimated to more than triple by 2010. For compa- nies seeking business opportunities in natural gas, Asia represents the largest burgeoning market for investment. This is because of Asia’s sustained economic growth, the low market saturation of natural gas despite an abundant resource base, and the need for large infrastructure development projects that cannot be funded solely by local sources.

This article focuses on the rapidly emerging East and Southeast Asian economies, whose rapid demo- graphic and economic growth has led to a dramati- cally higher demand for energy. Natural gas will inevitably play an increasingly important role in satisfying this new demand as a result of its abun- dance, growth in gas-fired power generation, and the environmental benefits offered by gas.

Singapore, South Korea, Taiwan, and Thailand. Over the past decade, annual growth in gross domestic product (GDP) of these countries (excluding Japan) and their neighbors has averaged 8.5 percent, four times the rate in the West. Rapid economic expansion

Asian Economic Growth Of the dozen fastest growing economies of the

past three decades, eight are in East and Southeast Asia: Hong Kong, Indonesia, Japan, Malaysia,

David Gray is vice president of Tenneco Energy Interna- tional.

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Natural Gas Investment Opportunities in Asia (Continued from page 1)

in turn has improved personal income levels, enhanced standards of living, and created new employment opportunities. Furthermore, eco- nomic growth is expected to average 8 percent annually over the next decade, according to the World Bank, as these nations play an increasingly active role in regional and world trade.

Because growth in energy consumption (and hence gas consumption) is linked to eco- nomic growth, it is important to understand the key drivers of economic expansion in these countries. They are (1) government policies that emphasize income generation rather than in- come distribution; (2) openness to foreign in- vestment; and (3) a large, educated, wage- competitive workforce.

Emphasis on Income Generation and Investment

Except for education, most Asian govern- ments have a narrower view of their role in providing social services than is prevalent in the West. Unemployment benefits, welfare, Social Security, and other similar services are either nonexistent or practiced to a much smaller degree. This absence of social services has been accompanied by two factors that are vital to sustained rapid economic expansion: high sav- ings rates and low taxes.

For example, the rate of savings in Asia is about 35 percent of GDP, two- and-a-half times that of the United States and double that of Latin America. The new savings gener- ated each year in Asia equals that of the United States and Europe combined. This high savings rate creates a significant source of capi- tal to fuel economic expansion.

Likewise, low taxes are a stimu- lus for investment. Income taxes in many Asian countries are sub- stantially lower than in the rest of the world. The top corporate tax rates are 26 percent in Singapore and 30 percent in Indonesia, com- pared to 53 percent in Germany and 39 percent at the federal level in the United States. Most Asian countries tax neither capital gains

nor interest, nor do they impose double taxation on dividend distributions.

Openness to Foreign Investment Despite their prosperity, many of Asia’s

developing countries do not yet have capital markets large enough to fund the massive infrastructure development required to sustain their current and anticipated levels of eco- nomic expansion. Recognizing this, these coun- tries welcome foreign investment in infrastruc- ture development, especially when it results in a transfer of technology. During the last ten years, direct foreign investment in these coun- tries has grown at over 30 percent annually (Exhibit 1).

Large and Capable Human Capital Human capital is another resource required

by developing nations to sustain high economic growth. In Asia, the workforce is large, relatively cheap, hard working, and educated. The region

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is home to over 1.8 billion people, one-third of the world’s population. This population base is expected to grow by 30 percent by 2010. In addition, literacy rates are comparable to those of Western nations. A recent United Nations report indicates that Asia now employs 1.23 million scientists in research and development, more than either Europe (1.1 million) or North America (900,000).

Role of Natural Gas Not surprisingly, Asia’s strong economic

growth has resulted in equally impressive growth in energy consumption (Exhibit 2). While Asia represents 30 percent of the world’s total energy use, the region accounts for more than half of the growth in world consumption. Asia has replaced the OECD as the leading region in absolute growth in fuel consumption.

Coal and oil continue to represent the bulk of the primary energy consumed in Asia (42 percent and 34 percent, respectively). These fuels, particularly coal, are abundant in a num- ber of Asian countries and are easily transported from production areas to market centers. De- spite representing only 8 percent of the total

energy consumed in Asia, natural gas consump- tion is growing by 10 percent a year, faster than any other primary fuel. Over the past 20 years, the natural gas share of consumption has grown while coal and oil have lost market share. The U.S. International Energy Agency estimates that by 2010, gas consumption will more than triple.

Key factors in this growth are (1) availability of supply, (2) increased gas use in power generation, and (3) increasing environmental awareness.

Availability of Supply Asia can easily accommodate continued

growth in gas consumption because of the presence of indigenous supply in many areas (Exhibit 3). The region possesses 1.5 times more gas reserves than oil. The region has 350 trillion cubic feet of proven gas reserves, compared to 245 trillion cubic feet in North America and 260 trillion cubic feet in Latin America. Historically, much of the gas produced in Southeast Asia has been liquefied and then exported to the energy- deficient countries of Northeast Asia-Japan, South Korea, and Taiwan. However, because liquefied gas is difficult and expensive to export, most countries are trying to find domestic uses for their gas. It is increasingly being substituted for oil in the industrial and power-generation sec- tors, making more oil available for export. Gas is also being used as a feedstock in fertilizer and petrochemicals production, effectively reducing imports of these products.

Increased Gas Use in Power Generation

Growth in electricity demand in Asia has been and will continue to be the highest in the world. For example, over the past 20 years the average annual growth rate in East Asia has been 9.4 percent. Electric- ity demand usually grows at rates comparable to the economic growth rate. However, in many Asian coun- tries electricity demand is growing far more rapidly. This difference can be explained by the historically low saturation rate of the electricity market as many of Asia’s rural areas are only beginning to build genera- tion, transmission, and distribution infrastructures. For example, de-

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mand in Indonesia is growing by 14 percent a year-twice the rate of economic growth. This growth is likely to continue as 74 percent of Indonesia’s population still does not have access to electricity. In addition, per capita consumption of electricity is low in Asia’s devel- oping countries, but it is rising rapidly as income levels improve.

As the electricity sector grows, gas will play a larger role as a he1 source in power generation. Tech- nological improvements in combined- cycle gas turbines have resulted in efficiency gains that have made gas more price competitive in power generation. Furthermore, new gas-fired power plants require less time to construct, while allowing greater flexibility in size and load management.

Increasing Environmental Awareness Developing countries are also experiencing

first-hand the environmental consequences of rapid industrialization. Upon weighing the so- cial and environmental costs of pollution, many countries are turning to natural gas as a solution even when it is not the most economical fuel alternative. The Jingbkan pipeline currently un- der construction in China is designed to reduce the use of coal for residential space heating, the source of much of Beijing’s air pollution. The efficiency and clean-burning nature of gas out- weigh the lower price of coal. Gas has also proven economically viable when the cost of adding clean coal technologies or emissions scrubbing is considered.

Opportunities for investment in the Natural Gas Sector

While Asia has significant gas reserves, they are often located in remote areas requiring extensive infrastructure development to make delivery to markets possible. New pipelines and

liquefaction facilities, as well as expansions of existing facilities, are needed in many areas. Current government plans call for investments of over $100 billion and involve the long-term construction of over 18,000 miles of additional pipelines.

Additionally, as these projects require more capital than domestic financial markets can provide, governments are searching for external funding. This search creates new opportunities for direct foreign investment.

Consequently, as the world’s leading region of economic and energy demand growth, Asia constitutes one of the world’s most attractive markets for investment in natural gas infrastruc- ture and financing. During the next ten years and conceivably throughout the next century, natural gas investment opportunities will abound in what may be termed “The Asian Century” in the energy industry.

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