HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS MINING NEWS

Providing coverage of Alaska and northern Canada's oil and gas industry
July 2003

Vol. 8, No. 28 Week of July 13, 2003

LNG market gets more competitive

As more sellers enter the market, Asian buyers are looking for better deals

Kristen Nelson

Petroleum News Editor-in-Chief

It's a different world than it used to be for sellers of liquefied natural gas. The terms for LNG sales to Asia — traditionally long-term inflexible contracts — are becoming more flexible as more sellers enter the market.

That was the message the June 28 Valdez LNG Summit heard from buyers Korea Gas and Tokyo Gas.

The summit, hosted by the City of Valdez and the Alaska Gasline Port Authority, also heard about the potential market for liquefied natural gas on the West Coast of North America (see part 1 of this story in the July 6 issue of Petroleum News), but the Asian market has been buying LNG from Alaska since 1969 when production started from the ConocoPhillips-Marathon Oil (then Phillips-Marathon) plant in Nikiski on the Kenai Peninsula. LNG has traditionally been sold to that market via long-term contracts with take-or-pay provisions and pricing tied to a basket of oil prices.

Korea Gas looking for more liberalized market

Hong-Shih Jean, vice president of the LNG purchase department at Korea Gas, told the summit that the company has seven long-term contracts and two mid-term contracts for LNG with six countries covering some 18 million tons. As those contracts expire the company has projected supply gaps to fill: 2.4 million tons in 2007, 5.3 million tons in 2010 and 17 million tons in 2015.

The contracts for the new supplies are expected to differ from existing contracts, he said, because current LNG long-term contracts don't look compatible with changes in the market environment. Korea Gas is looking for flexibility in its off-take obligation to meet increasing uncertainty in demand and removal of a final destination clause. The “take-or-pay” clause needs to be relaxed, he said. And the price needs to be more market driven and competitive.

“Reliable and flexible forms of LNG trade should replace traditional ways of LNG trade,” Jean said.

Tokyo Gas even more explicit

Mead Treadwell, managing director of the Institute of the North, told the summit that he and former Alaska Gov. Walter Hickel met in June with LNG buyers in Japan, including Shigeru Muraki of Tokyo Gas Co. Muraki wanted to come to the summit, Treadwell said: “basically I'm making his presentation,” based on a talk Muraki gave in February.

When they met with him, Treadwell said, Muraki discussed some of the same changes in the LNG market as those described by Hong-Shih Jean of Korea Gas: “an attempt to get the market oriented to competitive positions and opportunities for trading.”

The Tokyo Gas overview describes an LNG market in transition: from a regulated market to sharpened competition in a liberalized market; from buyers such as gas and power utilities with government investment to an increased number of sellers and buyers, including marketers and traders; from buyers' consortiums to more individual contracts; from closed negotiations to emergence of an open market including short-term and spot sales; from long-term contracts to a variety of trading opportunities including spot, swap and arbitrage; from take-or-pay contracts with limited flexibility to contracts tailor-made for individual buyers; from pricing tied to a crude oil index to pricing de-coupled from crude oil; and from an upward trend in prices to a downward trend.

Treadwell said there were about six suppliers when Alaska started shipping LNG, compared to a larger number of suppliers now. What Tokyo Gas sees now, he said, is “sharpened competition in the liberalized market” with “an increased number of sellers and buyers” and the possibility of an open tender, rather than closed negotiations.

And Tokyo Gas expects, he said, that as these changes take place, they “may tend toward a downward trend in prices.”

Japanese interested in upstream investment

And, he said, they heard on their trip a couple of times that Japanese parties have an interest “in investing in the upstream side.”

As far as an Alaska project, Treadwell said, “we were told, very clearly, that supply is essential to project success. … (Potential buyers) have not seen gas supply committed to a project and they believe that's important.”

Authority also sees contracts changing

Rigdon Boykin of O'Melveny & Myers, speaking for the Alaska Gasline Port Authority, agreed that we “have to break the model of past contracts to sell this volume of gas in Asia.” The price in most contracts, he said, has been tied to a basket of oil, and that needs to start changing to “gas-on-gas” pricing.

“Most of these (Asian) countries have been severely damaged by big swings in gas pricing that's caused by the basket-of-oil approach,” he said, and “we believe if we deviate from that and go to a base price and that base price only changes if gas-on-gas in the domestic market changes substantially,” then it would be possible to get the kind of contracts needed to put Alaska LNG into Asian markets.

That type of a contract, he said, would involve a floor price with slight escalation for variable costs and then an index based on gas-to-gas competition. There are, he said, “a number of analysts that believe that it's going to be true gas-on-gas competition worldwide in the next five to 10 years.”






Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.