Asia’s premium long-term LNG deals

The spot market in LNG and natural gas might be off, those long-term LNG deals in Asia are still very frothy..

Asia-Pacific sees premium long-term LNG deals
28 Sep 2009, 0015 hrs IST, Ramkrishna Kashelkar, ET Bureau

Notwithstanding the crash in natural gas prices and low prices of liquefied natural gas (LNG) in the spot market, fresh long-term deals in the Asia-Pacific region are being struck at very high prices.

Last month, Petronet LNG announced a tie-up for 1.5 million tonne of LNG from an Australian company for its upcoming Kochi terminal. Although none of the parties have officially declared the prices, the 20-year contract is reportedly valued at $20.5 billion, which translates in a price of $13.5 per million metric British thermal units (mmBtu).

“Prices in the spot market and long-term contracts, which are typically for 20-25 years, are not comparable,” said Amitava Sengupta, finance director at Petronet LNG, India’s largest importer of LNG.

Spot prices are currently low due to the economic downturn, however, they will pick up sooner or later,” he said, adding that prices will rise further as long-term LNG demand is expected to outstrip supply. In India, gas prices have been hugely controversial because of the disputes between RIL and NTPC and RIL and RNRL. Domestically-produced gas costs in the range of $1.8 -$5.5 per mmBtu.

The value of long-term contracts for Australia’s Gorgon LNG project, signed recently by its three consortium members — Chevron, Exxon Mobil and Shell — is estimated to be $200 billion. The 15-MT per annum LNG project is expected to come up in western Australia by 2014 at an estimated investment of $37 billion.

The US Henry Hub natural gas prices have dropped over 33% since the beginning of 2009 to $3.45 per mmBtu, a period when the crude oil prices more than doubled. At the same time, the spot LNG cargoes, which had scaled up to $19-20 per mmBtu last year, have come down to $4-5 levels currently.

In the Asia–Pacific region, where nearly 90% of the international trade in natural gas happens by way of LNG, demand for LNG far outstrips supply and it is purely a seller’s market. It has been worsened due to a clutch of dominant buyers, including Japan, South Korea and Taiwan, which together consume 62% of world’s LNG, bidding aggressively for future supplies.

“Japan, which is importing LNG since 1969, has a number of LNG import deals struck at pretty low-prices 5-10 years back when the crude oil prices were very low. As a result, the aggressive pricing of the current contracts hardly adds to their overall gas cost,” said a high-ranking official with a national oil company.

As a result, the relatively smaller LNG consumers in the region, such as India, have to accept the high prices in order to secure future energy supply. The US and European countries, where the natural gas imports take place predominantly through pipelines, import LNG only to meet their peak demand, and hence, are not affected by the spike in LNG prices. The key question is whether Indian consumers would buy gas at such steep prices.

Today, the new long-term LNG contracts are linked directly to the crude oil representing around 14%—16% of the per barrel prices without any floor or ceiling limits. Even though this appears very high in the current scenario, LNG is still cheaper compared to the liquid fuels, such as naphtha or oil, and beneficial to the final consumer. Hence, we are not worried about its marketing,” said the official from the national oil company.

In simple terms, with benchmark crude oil prices at $70 per barrel, LNG will cost around $9.8 – 11.2 per mmBtu on FOB basis, depending on the pricing formula agreed upon in individual contracts. It will rise to $14–$16, if the benchmark crude prices rise to $100 a barrel. Japan, being the largest LNG consumer, Japanese crude cocktail (JCC), as determined by prices of the country’s imported crude oil, is generally taken as the benchmark in such LNG deals.

The direct link to the crude oil prices is making import of LNG in future costlier, particularly when crude oil prices are expected to move up in the foreseeable future.

For the Indian consumers, who will primarily replace their liquid fuel consumption with this imported LNG, the proposition will still make sense. Industry experts believe Indian demand for gas to grow in tandem with the supply and there will always remain a gap to be filled with imported LNG.

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1mmBTU is roughly equal to 1Mcf (1000 cubic feet)