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Pacific LNG prices heading down Far East buyers taking advantage of new suppliers looking to sell their gas Larry Persily Petroleum News Juneau Correspondent
While U.S. consumers grimace at this winter’s high natural gas prices, Far East buyers of liquefied natural gas are driving down prices for future deliveries and squeezing their suppliers for even better deals.
Several industry sources have reported a 15-year deal for Indonesian LNG delivered to China at $2.90 per million British thermal units, a steep drop from the average LNG import price to Japan of $4.27 in 2002 and $4.62 in October 2003.
It’s all about supply and demand.
Until new LNG receiving terminals are built or natural gas is piped from the Arctic to domestic markets, U.S. consumers will find themselves coping with too little supply for too much demand. But in Japan, South Korea, Taiwan, China and even India, there is a lot more supply of future LNG deliveries than the demand can burn up.
“You’ve got a lot of people trying to put projects into place,” said Jim Jensen, a Massachusetts-based natural gas consultant with 30 years experience. Competition among LNG projects will push down prices, he said. And while there is demand growth in Pacific Rim nations, it is not growing fast enough to keep pace with all the new supplies coming into the market. It’s a buyers market New supplies scheduled to come online this decade include projects in Indonesia, Australia, East Timor, Russia’s Sakhalin Island and large-scale expansion of Qatar’s LNG exports.
Indonesia is under pressure to cut its LNG prices for Japanese and South Korean buyers, India is negotiating lower rates from Qatar, and even Norway’s biggest oil company said it can deliver LNG to the U.S. East Coast for under $3 per million Btu.
“The Asia-Pacific LNG market certainly presents buyers with more supply options so that buyers can ask for improved contract terms,” said Tomoko Hosoe, a Honolulu-based consultant on Asian and Pacific oil and gas. “Japanese buyers have already become aggressive in renewing and signing new LNG contracts.
“Gas buyers will become increasingly accustomed to supply contracts with shorter terms and increased flexibility,” Hosoe wrote in a recent research paper.
LNG sales to Japan have historically been tied to a blended price of oil, the so-called Japanese Crude Cocktail, Jensen explained. But with oil prices high, and LNG projects looking for contracts, buyers want to break away from an inflexible price link with oil, he said. Japanese want lower prices Japanese utilities reportedly are demanding base prices lower than the $2.90 per million Btu negotiated by the China National Offshore Oil Corp. for LNG from Indonesia’s Tangguh field, according to Indonesia officials quoted in World Gas Intelligence.
“The $2.90 deal was very shocking,” said Akihiro Takase of Tokyo Gas Co., Japan’s largest utility. And it appears the utility will remind current suppliers of the new price as they negotiate new contracts.
“We want a more competitive LNG contract price,” Takase was quoted in the trade press. Tokyo Gas is one of two buyers of Alaska LNG from ConocoPhillips’ plant on the Kenai Peninsula. Tokyo Gas and Tokyo Electric Power Co. combined take the equivalent of about 170 million cubic feet per day of Alaska LNG.
ConocoPhillips’ contract expires in 2009, and the company is looking to extend the contract, assuming gas supplies are sufficient to meet LNG and local utility requirements, said ConocoPhillips’ spokeswoman Dawn Patience of Anchorage. Contract flexibility an issue, too In addition to lower prices, buyers are looking to relax the take-or-pay and destination clauses in contracts, said Shinji Ohno of Osaka Gas in Japan. Under a take-or-pay deal, a buyer agrees to either take the full load of the LNG contract or pay the full amount owed. The destination clause restricts delivery to a single receiving terminal. Both provisions are too restrictive in the new, highly competitive marketplace, Ohno was quoted by Dow Jones Newswires.
South Korean buyers also are taking advantage of the situation.
The South Korean steelmaker POSCO did not announce the purchase price when it signed a deal earlier this year to buy about 80 million cubic feet a day of LNG from BP’s Indonesia project at Tangguh, but the company did report the deal would save it almost $40 million a year in LNG costs. That works out to a savings of about $1.40 per thousand cubic feet from previous contract prices.
The contract is scheduled to start up within two years and run for 20 years.
Several of Indonesia’s LNG supply contracts expire at the end of the decade, and the country’s minister of energy and mineral resources, Purnomo Yusgiantoro, was quoted in a Jakarta newspaper as acknowledging, “The price that we will offer will not be as high as in previous years.”
The trend toward lower prices is not limited to Pacific Rim buyers. India is seeing savings, too. Qatar’s RasGas recently signed a 25-year supply contract with Petronet LNG in India for a reported price of about $3.60 per million Btu, with the oil ministry pushing for reduced customs fees and taxes to further reduce the price.
Meanwhile, in the Atlantic market, Statoil ASA of Norway said in November it could produce gas at its Snoehvit project in the Barents Sea, liquefy it and deliver it to the U.S. East Coast for $2.90 per million Btu starting in 2006.
The lower prices are just about competition for market, Jensen said in recent presentation to the National Association of Petroleum Investment Analysts. Construction costs for regasification plants and LNG tankers have dropped substantially in recent years.
And there is always a lot of gaming in the industry to block or fake out competitors, Jensen said. “If you’re an old LNG hand you tend to be very nervous.”
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