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Market awaits impact of NA LNG exports
Bill White Researcher/writer for the Office of the Federal Coordinator
Slumbering giants get moving
Japan and China weren’t slow on their feet for long.
Starting in the summer of 2012, Japanese buyers signed these tentative deals:
•Mitsui & Co. and Mitsubishi Corp. signed to take about 1.1 bcf a day from the proposed Cameron LNG export plant at Hackberry, La.
•Tokyo Electric Power then signed to take about 100 million cubic feet a day of the Mitsui and Mitsubishi shares. TEPCO is negotiating for an additional 160 million cubic feet a day from other suppliers, the company’s managing executive officer said in February 2013.
•Osaka Gas and Chubu Electric Power have deals for 600 million cubic feet a day from a proposed export plant in Freeport, Texas.
•Tokyo Gas and Sumitomo Corp have signed for about 310 million cubic feet a day from a proposed Maryland export project.
These deals are preliminary because the proposed LNG plants involved still need regulatory approval ... and corporate go-ahead for the billions in construction.
Chinese companies have been busy investing in shale gas plays or possible LNG projects in North America, Australia and Africa. Some Japanese companies have made similar investments.
“Japan expects LNG exports from the U.S. will be a game changer for the Japanese LNG market,” Shinichi Kihara, head of global affairs at Japan’s trade ministry, said at a Houston energy conference in March 2013.
“Price really matters to Japan,” he said. “There are many options, but we think the principle is to have a formula that represents the demand and supply situation in Asia.”
Kihara echoed sentiments first expressed publicly in September 2012 by Japanese, Korean and Taiwanese leaders and utility executives at an LNG conference called by the Japanese government.
“Japan’s LNG prices have deviated significantly from international norms,” said Tsuyoshi Okamoto, president of Tokyo Gas. “If this discrepancy continues, it will result in curbed natural gas consumption and conversion to other energy sources.”
Whipsawed in Japan Japan has been double-whammied since the March 2011 earthquake and tsunami sparked an on-going safety shutdown of most of the nation’s nuclear power plants.
LNG imports are up — 25 percent.
So are LNG prices — 50 percent.
In the past two years Japan endured its first trade deficits since the early 1980s.
“As a result of larger LNG import volume and surging prices, LNG import value has increased. This, along with decreasing exports of goods and services owing to the global economic recession, constitutes a major factor of Japan’s trade deficits and the downward pressure on Japanese economy,” the Institute of Energy Economists Japan said in a January 2013 report.
The IEEJ estimated Japanese utilities could save billions by importing LNG at North American prices.
More movement toward Henry Hub pricing Japanese companies aren’t the only businesses knocking on doors of proposed U.S. LNG plants to talk terms.
In January 2013, Shell preliminarily agreed to take up to 500 million cubic feet a day as LNG from a proposed plant in Savannah, Ga., for marketing to Shell customers worldwide.
In February 2013, BP tentatively agreed to take up to 590 million cubic feet from a proposed LNG export project in Freeport, Texas.
Separately, in November 2012, BP’s Singapore arm signed a preliminary long-term deal to sell 67 million cubic feet a day to Kansai Electric at prices linked to the Henry Hub.
Henry Hub prices reportedly have started seeping into contracts for LNG sourced elsewhere in the world.
BG Group recently committed Australian LNG to a China energy company at a price 25 percent linked to Henry Hub and 75 percent linked to oil prices. Chevron also reportedly committed Australian LNG to two Japanese utilities that included a small Henry Hub linkage.
In addition, BP signed a deal with Japan’s Chubu Electric to supply about 1.1 bcf a day of LNG for 16 years at prices partly indexed to the British gas hub called National Balancing Point, according to trade publication ICIS Heren in December 2012.
And Qatar recently weakened the oil-link formula slightly in contracts with three Japanese utilities, ICIS Heren said.
The rise of oil-linked prices Linking Asia LNG prices to oil dates to the 1970s, when oil-price shocks sparked long lines at gas stations, runaway inflation and swooning economies in developed countries.
At the time, imported oil by far was the fuel of choice for resource-poor Japan. To break its dependence on oil, Japan began building nuclear power plants and importing LNG, then a new product on the global trade scene.
But how to price LNG? Sellers needed long-term contracts at high enough prices to support the massive cost of building LNG plants. Oil would be the fuel displaced, so Japan agreed to link LNG prices to the oil-imports cost, a blend of prices known now as the Japan Crude Cocktail.
Because a standard unit of natural gas — 1 million Btu — packs about 17 percent of the energy found in a barrel of oil, this percentage — called the “slope” — is a kind of starting point for the oil-linked formula during contract negotiations. It might be much smaller for contracts negotiated in a buyer’s market. A typical contract today might set this slope at 14 to 15 percent of the oil price. A contract also could install a ceiling on price to protect buyers, and a floor to protect sellers.
When South Korea started LNG imports in 1986 and Taiwan in 1990, they were shopping the same suppliers selling to Japan, and the oil-linked price became standard in their contracts, too.
Until 2012. That’s when buyers’ pushback got traction.
“With the paradigm shift due to full-fledged production of shale gas (in North America), oil-linked indexing is starting to be less reasonable,” said Yukio Edano, Japan’s trade minister, at the September conference in Tokyo. “If new suppliers from North America, Russia and Africa enter Asian markets in a few years, it will no longer be reasonable.”
In November, a Japan trade ministry official put it this way: “From all the aspects, U.S. LNG is a very, very shining treasure ... for us.”
Sellers recoil Lest one conclude that global LNG sellers are hunkered behind the ramparts while all this revolutionary Henry Hub talk is going on, think again.
“I can tell you it takes a large capital commitment, and most companies in the world aren’t going to make that commitment without having pricing that gives them a fair return, and that pricing is going to need to be something close to oil parity, or the projects won’t get built,” John Watson, Chevron’s chief executive, said in February 2013. Chevron is a partner in two Australia LNG projects and is proposing a major export project for Canada’s West Coast.
In March, Watson hit it again: “Given the large capital requirements, long construction lead time and obstacles to development, there are only a handful of companies that have the financial and operating capability to take on LNG projects. And they will require a fair return on their investments to do so. This will necessitate long-term purchase contracts with robust underlying LNG prices.”
An executive with Apache Corp., which is partners with Chevron in Australia and Canada, said Cheniere’s deals for LNG from its Sabine Pass, La., plant under construction have created “unrealistic expectations” among LNG buyers.
The CEO of Santos, which is developing a different Australian LNG export project, said in November that Japanese buyers need to know the supplies they buy will arrive when wanted. “They like to know that the molecules are there in the ground and they will, through prudent operators, be delivered into Tokyo Bay,” said David Knox. “I suspect there will be a mixture of the way contracts are linked but I think ... fundamentally [oil price linking] will remain and the reason it will remain is [because] of security of supply being so important.”
A trade group sounded off, too.
“Oil parity prices are fair enough in order to establish a win-win scenario for both suppliers and consumers. Otherwise the producing country’s huge investment for capital intensive gas export projects would not be economically viable,” said Leonid Bokhanovskiy, secretary general of the Gas Exporting Countries Forum. “The loss in short-run may hit only producers but in long-term project financiers will lose motivation for investment. The lack of investment will lead to production declines. It is to benefit of consumer and supplier to buy and sell gas at the fair price.”
Some analysts see a future for oil-linked pricing, too. “The Asian LNG price will remain predominantly linked to oil for the next 20 years or so,” said Shahriar Fesharaski of FACTS Global Energy, at a Singapore conference in January 2013. “The incremental volumes over the next few years are coming from Australia and they are linked to oil, and in 2016-2017 we could see some U.S. projects coming online, so Henry Hub linkage will increase a bit, but the incremental volumes will still be linked to oil,” Fesharaki said.
A Sanford Bernstein analyst said in October 2012, “There is no such thing as a global gas market, and we think it is unlikely there ever will be in the next 20 years.” The analyst, Neil Beveridge, added, “The expansion of gas projects in Australia would not have been possible without the direct linkage between oil and gas prices.”
How much U.S. LNG? Nearly everyone notes that a rise in North American gas prices or a dramatic fall in world oil prices would let the air out of plans to export U.S. gas.
The wide divide between U.S. and Asian gas prices is a recent phenomenon, opening up only starting around 2008 when substantial shale gas started hitting U.S. markets and, separately, world oil prices skyrocketed.
Before that, any price premium LNG garnered in Asia was too small to justify shipping North American gas there. In fact, from 2003 through 2005, Henry Hub prices were higher than Japan LNG prices.
“It is important to note that Henry Hub pricing doesn’t necessarily mean cheap pricing,” Andrew Walker, vice president for global LNG at U.K.-based BG Group, said at a London gas conference in October.
“It is uncertain whether U.S. LNG can actually be imported at a low price,” the IEEJ study said.
Walker and others think the global gas market has room for only so much U.S. LNG.
Still, optimism reigns among Asian buyers.
“Thanks to shale gas, we now have a realistic chance of solving our energy problems,” mused Hidetaka Matsuzaka, a senior Osaka Gas executive, in November. “If we can purchase LNG at U.S. market prices and diversify our overall pricing structure, this will be a significant achievement indeed.”
Part 1 of this story ran in the April 21 issue of Petroleum News.
Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/market-awaits-impact-north-america-lng-exports.
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