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New LNG projects threatened by pricing debate

03.06.2014  | 

Dozens of multibillion-dollar liquefied natural gas (LNG) shipping terminals proposed from Canada to Mozambique risk being held up by an industry debate over how to determine the fuel’s price.



Dozens of multibillion-dollar natural gas shipping terminals proposed from Canada to Mozambique risk being held up by an industry debate over how to determine the fuel’s price.

Investment by companies including BG Group, Chevron and ExxonMobil in seaside terminals to liquefy gas for global transport depends on buyers signing long-term contracts at prices high enough to justify projects that can cost more than $50 billion.

Some Asian buyers are holding off on 20-year purchase agreements as they assess how US exports may impact prices, according to industry consultants ADI Analytics.

“Pricing is definitely the critical issue,” Uday Turaga, chief executive officer of ADI Analytics, said in an interview at the IHS CERAWeek conference in Houston. “There is the view among buyers that there is going to be a significant amount of supply coming on stream and they feel they can wait on contracting decisions.”

Energy companies are vying to build coastal gas export terminals in the US to capture prices in Asia that are now five times higher than North America’s. Surging supplies of the fuel from shale formations overwhelmed domestic demand and deflated prices.

Cheniere Energy's Sabine Pass, the first US liquefied natural gas, or LNG, export terminal under construction, has contracts with customers including Centrica and Total. Freeport LNG Development, with the next US project in line on the US Gulf Coast, has long-term agreements with Osaka Gas, Chubu Electric Power, BP, Toshiba and SK.

Industry Dispute

Gas supplies from US projects would cost less than Canadian projects, between $10 and $12 per thousand cubic feet, compared with $11 to $13, Greg Pardy, an analyst at RBC Capital Markets in Toronto, wrote in a Feb. 25 report. Liquefaction costs will be lower in the US, where some projects can build on to existing LNG import facilities, he said.

The industry is disputing the potential for the spread between US and Asian gas prices to narrow, which would lower the cost for consumers of the fuel, including power utilities in Japan, Korea and India. A resolution may not emerge until 2015 when the first US LNG supplies are expected to come online, Turaga said.

Most of the global LNG market is priced through long-term contracts linked to oil prices rather than gas. There’s a limit to how much those contracts can change because while buyers are seeking prices linked to US gas, they don’t want to be dependent solely on that country, BG Group CEO Chris Finlayson said at the conference.

Buyers Benefit

“Looking at the global LNG trade through to 2025, we still see supply rather than demand as the constraining factor,” Finlayson said.

As both supply and demand rise and infrastructure is developed around import terminals in Asia, buyers will benefit from lower prices, said Rajeev Mathur, executive director of marketing at GAIL India.

“By 2025, hopefully more buyers, more sellers, more liquidity, more infrastructure would happen and will eventually lead to a convergence of prices,” Mathur said in an interview at the IHS CERAWeek conference.

The potential for Asian LNG prices to fall relative to the price for US gas would require more than the “marginal” 50 million tpy of US exports that are probable in the near term, said Stephane Caudron, head of LNG at Gunvor International in Geneva.

For price convergence to happen, it would require “a huge amount” of US gas to be exported to the rest of the world, Caudron said in an interview yesterday.

It may take until later this decade, when US exports become significant, before buyers and sellers of LNG start to agree on how to set the price, Turaga said.

“The companies that buy large volumes of LNG are using their heft to frame the debate,” Turaga said.

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