Clyde Russell: Asian Buyers' Dreams of Cheaper LNG Likely to be Elusive
SINGAPORE, Sept 13 (Reuters) - Asia's liquefied natural gas buyers are counting on an end to oil-linked prices and a surge in new supply from the United States to deliver cheaper fuel.
They are likely to be disappointed.
Not because contracts linked to crude oil prices will endure: they probably won't.
And not because new supply won't come from the United States: it will.
The underlying assumption behind buyers' hopes for lower prices is that there will be more new supply coming on line in the next few years than can be met by demand growth.
This assumption may prove accurate, but it's predicated on all the planned liquefaction plants being built within the timeframes that have been announced.
It's here that the dreams of a supply boost driving down prices for LNG buyers such as Japan, China and India run the risk of being too optimistic.
At a meeting of LNG buyers and producers in Tokyo this week, Japan, the world's biggest consumer, and India led the charge to demand changes to the way the super-chilled fuel is priced.
Instead of tying long-term contracts to the price of crude oil, buyers want deals with shorter durations and prices linked to natural gas benchmarks, such as the U.S. Henry Hub and the British National Balancing Point.
The thinking is that these natural gas benchmarks more accurately reflect the reality of increased global gas supply caused the by shale revolution in the United States.
Certainly, U.S. gas prices have plummeted since shale supplies hit the market. The current price of around $3.64 per million British thermal units is less than half of what it typically was five years ago.
British prices are around the equivalent of $10 per mmBtu, while spot Asian LNG prices
Looking at those numbers it seems clear that Asian LNG buyers are paying considerably more than consumers in the United States or Europe.
The buyers hope that new supply from the United States, Canada and places like Mozambique will become available on an uncontracted basis, thus boosting the amount of LNG priced on short-term contracts and dragging prices down.
Certainly the United States stands to become a major LNG exporter within the next four years, with four projects now having the necessary approvals.
These four, of which Cheniere Energy's Sabine Pass is the most advanced, will likely add about 50 million tonnes per annum of LNG to global supply.
There is another 150 million tonnes per annum of potential U.S. supply, but it's extremely unlikely that all of those proposed export plants will be built, for a variety of reasons.
While U.S. Department of Energy approvals for projects have perhaps been faster than many expected, there is likely to be increasing political pressure for a slowdown, even though studies suggest LNG exports won't have much, if any, impact on domestic gas supplies and prices.
It's still an easy mark for politicians to run a line that the United States should not be exporting cheap energy to its competitors, rather that indigenous gas should stay at home and support U.S. industry and jobs.
The other major factor to consider is this. What if the major LNG buyers are successful and prices fall to closer to that in the United States and Europe?
If this happens, LNG projects, even those based on cheaper shale gas, will become less economic and are thus unlikely to secure financing.
It would also put a very sharp stop to any expansion of plants in Australia beyond the current building programme that will make the country the world's largest producer by 2020, overtaking current number one Qatar.
For example, the massive 15.5 million tonne per annum Gorgon project being built by Chevron in Western Australia will cost around $50 billion.
These mega-projects cannot be financed without the certainty of buyers and prices that will ensure profitability.
Remove the certainty of long-term contracts and prices and no new projects will be built.
This means that even if oil-linked contracts are replaced by ones linked to gas benchmarks, producers will still insist on premiums that guarantee returns.
There is about 96.8 million tonnes a year of LNG supply currently under construction globally, of which 57.7 million tonnes is in Australia. There is also a further 132 million tonnes a year being planned outside the United States, and lower prices would likely end those projects.
The only way the buyers can win is if LNG supply does exceed demand and there is a surplus of cargoes available.
The vast majority of the new supply coming on stream in Australia is already under long-term contracts, meaning not much will find its way to the spot market.
Even the U.S. projects are signing long-term deals, and most analysts see the LNG market remaining tight until at least 2017.
However, it will remain tight beyond that if the economics of LNG deteriorate to the point where new projects become unviable.
Asia's LNG buyers want cheap prices and security of supply. But they can't have both and ultimately they will have to choose.
(Editing by Tom Hogue)
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- Weatherford CEO's Rebound Plan Relies On Getting Smaller
- Iran Says Oil Market Is Too Tight For US Zero Exports Target
- China's Squeezed 'Teapots' Eye Petchem Path To Riches
- Baker Hughes: US Drillers Add Oil Rigs For Second Week In Three
- Venezuela Hands China More Oil Presence, But No Mention Of New Funds
- Blockchain Demands Attention in Oil and Gas
- Macquarie Sees USA Oil Production Exiting 2024 at 14MM Barrels Per Day
- Oman Sees Increasing Ship-to-Ship Transfers of Russian Oil Bound for India
- CNPC Opens Sea-Land Oil Storage and Transport Facility in Bangladesh
- US Govt Makes Record Investment of $6B for Industrial Decarbonization
- Perenco Still Searching for Missing Person After Platform Incident
- Eni, Fincantieri, RINA Ink Deal on Maritime Decarbonization
- Falcon Oil Declares Commercial Flow Test Results for Shenandoah Well
- Oil Falls as US Inventories Increase
- Czech Utility CEZ Bucks Weaker Prices, Demand to Log Record Annual Profit
- Equinor Makes Discovery in North Sea
- Standard Chartered Reiterates $94 Brent Call
- India Halts Russia Oil Supplies From Sanctioned Tanker Giant
- Centcom, Dryad Outline Recent Moves Around Red Sea Region
- DOI Announces Proposal for Second GOM Offshore Wind Auction
- PetroChina Set to Receive Venezuelan Oil
- Czech Conglomerate to Buy Major Stake in Gasnet for $917MM
- US DOE Offers $44MM in Funding to Boost Clean Power Distribution
- Oil Settles Lower as Stronger Dollar Offsets Tighter Market
- UK Grid Operator Receives Aid to Advance Rural Decarbonization
- Chinese Mega Company Makes Major Oilfield Discovery
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Another Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Vessel Sinks in Red Sea After Missile Strike
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension
- Equinor Makes Discovery in North Sea
- Standard Chartered Reiterates $94 Brent Call