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LNG sellers bet on oil-link amid US shale gas boom

11th June 2012

Asian gas demand will surge 50 per cent over the next five years, driven by China’s expanding economy, according to the International Energy Agency (IEA)

Producers such as Qatar, Russia and Australia typically sell LNG to Asia under long-term contracts linked to the price of crude

Gas producers from Qatar to Australia are banking on Asian customers sticking with oil-linked supplies even as the cheapest US prices in 10 years tempt them to buy North American shale exports.

Asia shouldn’t gamble on US gas staying at current levels, according to RasGas Co, Qatar’s second-biggest producer. US sales may be limited by the nation’s need for power generation and the threat of exports driving up domestic prices, said Woodside Petroleum Ltd. Japan, the biggest liquefied natural gas importer, paid more than USD 17 per million British thermal units in April, compared with an average US gas price of about USD 2.

The region’s gas demand will surge 50 per cent over the next five years, driven by China’s expanding economy, according to the International Energy Agency. US producers including Cheniere Energy Inc want to lure buyers from Japan to South Korea with shipments from eight proposed export terminals. While North American shipments could account for 10 per cent of world LNG supplies, it’s unlikely that all the projects will start, according to Tokyo Gas Co, Japan’s biggest distributor.

“Long-term contracts are for 25 years or so, and betting gas prices will remain low for 25 years is a big gamble for consumers,” Hamad Rashid al-Mohannadi, the managing director of RasGas, said in Kuala Lumpur on June 6. “If you’re looking for security of supply, you would rather look for supply from projects that are up and running.”

A boom in extracting gas trapped in shale rock has helped the US surpass Russia as the world’s biggest producer of the fuel and brought it close to energy independence. Futures slid to $1.902 per million Btu on the New York Mercantile Exchange 19 April, the lowest since January 2002 amid a supply glut.

US exports to Asia would cost USD 9.35 per million Btu, based on a benchmark Henry Hub price of USD 3, according to a 29 May presentation by Cheniere, the Houston-based company developing the nation’s largest LNG export terminal in Louisiana.

US supplies are competitive in most markets, De La Rey Venter, Royal Dutch Shell’s global head of LNG, said in Kuala Lumpur, where industry executives met this week for the World Gas Conference.

“Exports from North America will be a good thing for global markets,” he said. “Otherwise it’s hard to see how the industry can supply the increase in demand on the scale and pace that’s required.”

Korea Gas Corp, the company that imports the most LNG globally, sees potential for the US and Canada to export the fuel to Asia, chief executive officer Choo Kang-Soo said on Thursday in an interview in Kuala Lumpur. South Korea has agreed to buy 3.5mn metric tonnes a year of LNG from the US starting 2017, he said.

Producers such as Qatar, Russia and Australia typically sell LNG to Asia under long-term contracts linked to the price of crude. The fuel is also traded as one-off cargoes in the spot market for short-term/near-term delivery and priced according to current market conditions.

“The link to the crude-oil price is no longer that reasonable, so we need to break that linkage,” said Mitsunori Torihara, the chairman of Tokyo Gas and the Japan Gas Association. Members of the association have been “recently more forthcoming” on purchasing from outside of Asia and are also “placing more emphasis” on proposals to peg imports to price benchmarks including Henry Hub and the UK’s National Balance Point, he said.

The price of US gas at Henry Hub will have limited sway in world gas markets, said Jean-Marie Dauger, executive vice president at Courbevoie, France-based GDF Suez, Europe’s largest power utility by market capitalisation.

“If there are some gas exports from the US, we will see some prices linked to Henry Hub, not oil,” Dauger said on Friday at the conference in Kuala Lumpur. “But that will remain limited because of the volumes. It will take a long time before oil and gas are totally separated in terms of prices.”

Oil-indexation gives buyers more clarity about future pricing, according to Brian Buckley, the chief executive officer of Oman LNG, which supplies utilities in South Korea and Japan.
“Markets need first and foremost security of supply and then comes price,” Buckley said in an interview in Kuala Lumpur. “Oil-indexation has worked in all these years. It offers utilities in Korea and Japan visibility in pricing.”

Henry Hub gas futures have slumped 54 per cent from their 2011 intraday peak of USD 4.983 per million Btu on 9 June. West Texas Intermediate oil futures in New York have dropped 16 per cent in the same period. Gas prices may rebound to average USD 4.58 in 2015 compared with USD 115 a barrel for WTI, according to analyst forecasts compiled by Bloomberg.

“In the US, you are always going to have constraints with the need for gas in power generation and the chemicals industry,” Woodside chief executive officer Peter Coleman said in an interview. “That says a lot of gas will stay in the US Australian LNG has its place.”

Woodside is the operator of the AD15bn (USD 14.6bn) Pluto LNG project in Western Australia.

US exports of LNG will be limited and oil-linked pricing will continue to prevail as the country seeks to control the price of the fuel, according to Christophe de Margerie, chief executive officer at Total.

“Exports of LNG will be limited for one simple reason,” he said at on Friday at the gas conference. “The US wants to keep the price under control, to the lowest possible level.”