Suppliers May Look to Tweak Contract Terms, Analysts Say
By
Eric Yep
Updated Jan. 30, 2015 12:41 a.m. ET 1 COMMENTS
SINGAPORE—The collapse in oil markets in recent months is now being mirrored in Asian liquefied natural gas markets, where prices have nearly halved in the last four months.
The price of LNG, a key fuel source for power generation particularly in northern Asia’s economic powerhouses, fell to $7.45 per million metric British thermal units on January 28, according to the Japan/Korea Marker published by Platts, a pricing agency, its lowest level since June 2010.
Just a year ago LNG—natural gas that has been supercooled to a liquid at minus 160 degrees Celsius so it can be transported on tankers—was trading at around $20 a mmBtu in Asia. As recently as October it was trading at around $14 a mmBtu.
The sharp drop in LNG prices is reducing the near-term returns on some major new plants that have been built in recent times, particularly in Australia, to meet an expected surge in demand from Asia. Countries like China are looking to use more gas in electricity production, to replace more environmentally-harmful coal, and in transportation to replace diesel fuel.
Over the next two years over 60 million tons a year of new LNG supply is expected to come on stream, a flood of new supply not seen since Qatar, the world’s largest natural gas exporter, started major operations in 2007-2008.
In December, Britain’s BG Group PLC started shipping cargoes from its $20.4 billion QCLNG project in Australia’s Queensland state. On the country’s west coast, the $54 billion Gorgon LNG project, operated by Chevron Corp. with backing from Royal Dutch Shell PLC and Exxon Mobil Corp. , is expected to come on line sometime this year. Exxon and its partners, including Australia’s Oil Search Ltd. , switched on a major LNG project in nearby Papua New Guinea last May.
For now, such new supply is swamping Asian demand growth, which has moderated as economic expansion has slowed across the region. In Japan and Korea, nuclear power plants closed following the Fukushima disaster in 2011 are slowly coming back on line, contributing to the slowing rise in demand. Gas consumption in China and India meanwhile hasn’t ramped up as quickly as expected.
That could lead to some LNG suppliers looking to tweak contract terms, analysts say.
“There is so much uncertainty in the market as to where crude is going in the next one or two years that it’s going to be very hard to find a comfortable [LNG] price mechanism that both the buyer and seller can agree on,” said David Hewitt, managing director and co-head of oil research at Credit Suisse . “I think there are going to be an awful lot of flights between negotiating sellers in Australia and buyers in Japan, South Korea and Taiwan,” he said.
While spot gas prices are an important indicator of market sentiment, the price of LNG supply contracted for the long term, which is a bigger chunk of the overall market, has also sunk. LNG-producing companies typically agree to sell most of their gas upfront at rates linked to oil prices, to fund their projects. When oil prices fall, that reduces producers’ revenue: Brent crude has lost almost 60% since June last year.
Several high-cost gas projects, from Australia to North America, that were under scrutiny when prices started weakening are now almost certain to stall or be adapted, analysts say.
In December, Woodside Petroleum Ltd. and partners including Shell said they were pushing back a final investment decision on the proposed Browse LNG project in northwestern Australia until 2016.
Meanwhile, talk of bringing more U.S. natural gas to Asia has dissipated as the gap between North American and Asian gas prices has narrowed.
“Henry Hub [the U.S. gas price benchmark] is a sound bite. It has been left at the side of the road and no one’s going to talk about that any more,” Mr. Hewitt said.
BDM Price at posting:
5.5¢ Sentiment: None Disclosure: Not Held
