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Asia LNG prices go below $3 Buyers negotiating low-cost deals with Iran, Qatar and Australia Larry Persily Petroleum News Government Affairs Editor
China and India, pushing for the best deals in Asia’s oversupplied liquefied natural gas market, are signing up for future LNG deliveries at $3 per thousand cubic feet or less, at least $1 under what Japan is paying and almost half the cost of LNG delivered to the United States.
Iran’s national gas company reportedly is negotiating a deal to sell LNG to India at close to $2 per mcf, plus shipping costs. And China recently signed a contract for LNG from Australia’s North West Shelf project at a reported price of $2.20 per mcf, plus tanker delivery charges.
Not to be left out of the bidding wars, Qatar reportedly has offered gas to China and India in the $2 to $2.50 range, before adding shipping costs.
China is leading the push to get away from the longstanding Asia market practice of pegging LNG supply contracts to a price based on what’s known as the “Japanese Crude Cocktail,” a blend of crude oil prices.
China’s negotiating stance can best be described as, “We’re not part of the old boys club, we just want cheap LNG,” said Gavin Law of international oil and gas consultant Wood Mackenzie Ltd. “They said, ‘Just give us your best price.’”
The move to lower-cost supply contracts got a big boost from last year’s Indonesia deal to supply gas from its Tangguh field to China at a delivered price near $2.75 per mcf, about $1 under the $3.75 that Japan was paying when oil was at $20 per barrel, Law said in an interview last month.
At $28 oil, Japan is paying closer to $5 per mcf, he said. “As a result, these projects made a lot of money.” At high prices, low-cost suppliers such as Indonesia are able to pocket a 40 percent rate of return, Law said.
Getting away from gas contracts pegged to rising oil prices is a key motivation for buyers signing new supply contracts.
China is more interested in paying less for gas than shelling out extra just to build relationships with suppliers, said Law, based in Edinburgh, Scotland. That premium for “security of supply” is old school in Japan and South Korea, he said.
“They opened the floodgates,” Law said of China’s ability to knock down the price with Indonesia. “Going forward, the general gist is that prices in the Asian Pacific will come down.”
Japan and South Korea will likely want the same lower prices, along with volume and delivery flexibility, as their long-term supply contracts expire and they look to negotiate new deals, he said.
It’s simply a matter of too much supply trying to court the same buyers, said a Shell Oil official. “New buyers coming in realized there is an oversupply and are negotiating hard,” Peter de Wit, Asia and Pacific business director for Royal Dutch/Shell Group, told Reuters news service at a recent energy conference in Qatar.
And it’s not just Iran, Qatar, Indonesia and the North West Shelf chasing buyers. Malaysia also has spare capacity to sell, and even with its high government take can move gas at $2.40 to $2.50 per mcf from its shipping terminal and still earn a 12 percent rate of return, Law said. Gorgon LNG Venture opens office in China Australia’s Gorgon LNG Venture has responded to the strong competition among LNG suppliers by opening its own office in Beijing. The Gorgon field, 80 miles offshore Western Australia, is the largest gas field discovered in the country, with proven reserves at almost 13 trillion cubic feet. Gorgon is a joint venture of ChevronTexaco Corp., Royal Dutch/Shell Group and Exxon Mobil Corp., with ChevronTexaco in charge of marketing the gas. Shipments could begin in 2008.
“The opening of an exclusive Gorgon representative office in Beijing is a significant step and indicates the importance of China as a destination for Gorgon LNG,” said Jay Johnson, managing director of ChevronTexaco Australia.
The falling prices and strong competition appear to validate last year’s forecast by Tokyo Gas Co. Ltd. The company, in a presentation to Japan’s Institute of Energy Economics, predicted downward pressure on prices, an increased number of LNG sellers, sharpened competition, and shorter-term contracts with more delivery flexibility.
“LNG prices are under pressure,” said Claude Mandil, head of the International Energy Agency, at the recent energy conference in Qatar.
And the pressure for lower prices could get stronger. “The economies of scale in shipping and liquefaction costs will allow the Qataris to project LNG further for the same cost. This will allow them to compete with producers who are closer to the market,” Frank Harris of Wood Mackenzie told Reuters. Qatar looking at world’s largest LNG train Qatar is proposing to build LNG liquefaction trains capable of producing 1 billion cubic feet of gas per day, five times larger than the average train operating in 2002, said Robert Wilson, a senior vice president with Tractebel LNG North America LLC. The Middle East nation is the “supplier to watch,” Wilson said at the North American Gas Strategies Conference April 20 in Houston.
And while Asian buyers are locking in gas supplies delivered to their docks at around $3 or less, LNG deliveries to U.S. terminals are selling in the $5.50 range this spring.
LNG prices to U.S. buyers could moderate somewhat in two or three years, when new and expanded receiving terminals are online and new supplies are shopping for buyers, Law said. Though close to 40 new terminals are proposed to serve the U.S. market, most industry observers expect maybe six or so to actually start service before the end of the decade. Alaska LNG exports could stop in 2009 A possible victim of falling LNG prices in the Asian market could be the ConocoPhillips plant on Alaska’s Kenai Peninsula. The facility, shipping an average 170 million cubic feet of gas per day, hasn’t missed a delivery since it opened in 1969. Although that has been important to its buyers, Tokyo Electric Power Co. and Tokyo Gas Co. Ltd., it’s another example of “old school” contracts that placed security of supply over price, Law said.
Kenai LNG has sold the past two years in Japan at around the mid-$4 range.
The plant’s export permit expires in 2009, and the natural gas shortage in Southcentral Alaska is driving up the price in the local market. That market change — and lower Asia prices — is likely to keep the gas in Alaska instead of loading it aboard tankers for Tokyo, Law said. “The fact is that Kenai has probably gone as far as it’s going to go.”
Kenai’s LNG exports to Asian are dwarfed by some of the deals under way to supply Far East markets. China signs for Indonesia, Australia LNG China has signed contracts to import a combined 800 million cubic feet per day from BP Plc’s Tangguh project in Indonesia and Australia’s North West Shelf project, where Shell is a major shareholder. Tangguh is expected to start delivering gas to China in 2007, a year behind Australia in 2006.
China is expected to pay about $3 per mcf for delivered Australian gas, based on oil prices at $20 per barrel. The Financial Express, a Bombay newspaper that covers Asia’s business news, reported the f.o.b. price for North West Shelf gas at $2.20.
And even when oil prices are higher, China’s risk of more costly North West Shelf LNG will be limited. Wood Mackenzie’s Harris told Reuters the contract would limit price increases to just 50 cents per mcf.
The China National Offshore Oil Corp. accepted the Australian offer after taking advantage of the buyers market and soliciting bids from Qatar, Indonesia, Malaysia, Russian, Yemen and Iran.
India is expected to sign a deal soon with Iran for an average 700 million cubic feet of gas per day, possibly starting in 2008, at close to $2 per mcf f.o.b., The Financial Express reported. And instead of linking LNG prices to the Japanese Crude Cocktail of oil prices, India is looking at a cost-plus contract. Iran looks to build LNG sales Iran also is courting China for LNG sales. A spokeswoman for Chinese state oil trading company Zhuhai Zhenrong Corp. reported in April it had signed an agreement with the National Iranian Gas Exporting Co. to take 5.3 tcf of gas over 25 years, starting in 2008.
The Chinese company estimated the deal at $20 billion.
Iran’s oil minister announced in April that his country is looking to launch three big LNG projects this decade — a partnership with France’s Total and Malaysia’s Petronas at 1.5 bcf per day; a project with Shell; and a third on its own.
And Shell is still looking for more buyers for LNG from its Sakhalin-2 project in Russia’s Far East, scheduled to start production in 2007.
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