US Gas Drillers Are Missing Out on Asia's Oil-Driven Boom
(Bloomberg) -- If you’re pumping natural gas in the U.S., you’re probably missing out on Asia’s boom.
That’s because the fortunes of most U.S. natural gas producers are pegged to the nation’s benchmark gas price, which slipped almost 9 percent since June.
Meanwhile, companies like Exxon Mobil Corp.’s partner Oil Search Ltd. sell most of their output to Asian customers linked to crude prices, which are up about 40 percent over that period. About 70 percent to 80 percent of Royal Dutch Shell Plc’s LNG is priced off oil, Chief Financial Officer Jessica Uhl said last week. And about two-thirds of BP Plc’s gas portfolio is oil-linked, Chief Executive Officer Bob Dudley said Tuesday.
The dichotomy is a relic of LNG’s early days, when it competed against oil and lacked an internationally-accepted benchmark. The fundamentals of the two have deviated in recent years, as the Organization of Petroleum Exporting Countries and its allies cut output to tighten the oil market, while new LNG projects worsen a glut.
“The LNG market is facing the prospect of widely diverging prices,” said James Taverner, an IHS Markit energy analyst in London.
As OPEC-led cuts pushed Brent briefly above $70 a barrel earlier this year, Morgan Stanley was among banks to recently lift 2018 price forecasts, saying they could average $75 in the third quarter.
At $75, LNG priced at 13 percent of Brent -- a common ratio -- would cost $9.75 per million British thermal units. The benchmark crude will average 16 percent higher this year, according to the median of forecasts compiled by Bloomberg, which would be equivalent to about $8.27 per million Btu.
Meanwhile, U.S. Henry Hub prices are seen 1.7 percent higher this year at $3.07 per million Btu. And a slate of new export projects coming online and softer summer demand means spot LNG -- that is, not bought through long-term contracts -- will average $5.90 per million Btu this year in Singapore, BMI Research said in a Jan. 4 note, compared with an average $6.803 last year.
Natural gas futures on the New York Mercantile Exchange rose 0.6 percent to trade at $2.718 per million Btu at 5:19 a.m. New York time.
Australia’s Woodside Petroleum Ltd. sells more than 90 percent of its LNG through oil-linked contracts, Chief Executive Officer Peter Coleman said in an interview. Shell’s Uhl said the benefits of higher oil will be seen in first quarter results because the price feeds through on a lag of three to four months. Woodside and Oil Search also flagged a three-month delay.
Qatar, the biggest LNG supplier, also has a majority of its sales linked to oil, according to data compiled by Bloomberg New Energy Finance. State-owned Qatar Petroleum didn’t respond to a request for comment.
A similar gulf between oil and gas in Europe last decade led to adjustments in long-term contracts and gas hubs gaining greater roles, said IHS’s Taverner.
But a similar transformation in Asia will be difficult, said Poorna Rajendran, a Singapore-based analyst for energy consultant FGE. While Asian prices such as S&P Global Platts’ Japan-Korea Marker and Singapore Exchange Ltd.’s Sling Index are gaining traction, they lack the necessary liquidity and transparency.
“Although a number of potential benchmarks are springing up in the region, as of now they’re still very underdeveloped and illiquid,” said Emma Richards, senior oil and gas analyst for BMI. “As a result, prices are lumpy, volatile and vulnerable to distortion.”
With assistance from Kelly Gilblom. To contact the reporters on this story: Dan Murtaugh in Singapore at firstname.lastname@example.org; Perry Williams in Sydney at email@example.com; Stephen Stapczynski in Tokyo at firstname.lastname@example.org. To contact the editors responsible for this story: Ramsey Al-Rikabi at email@example.com Abhay Singh.
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