The long-running stand-off on LNG pricing between big Asian buyers and their existing and potential suppliers has gone beyond being just a war of words. What was very clear at last month’s Gastech conference and exhibition – held in Seoul, the capital of South Korea – was that buyer behaviour has been changing and potential new projects, especially those outside North America, are consequently struggling to reach final investment decision (FID).
Asia, which already accounts for more than two-thirds of LNG demand, is expected to be the main centre of future demand growth – so the views of Asian buyers matter.
Over the past two to three years, what began as the occasional lone voice complaining about the perceived unfairness of what has come to be called the “Asian premium” has become a clamour. Most of the first day of the Gastech conference ended up being devoted to this issue, with panels of buyers and sellers putting forward their mostly opposing views.
At one point, representatives from all three of the long-established Asian LNG-buying nations – Japan, Korea and Taiwan – were up on the platform together, delivering much the same message.
The issues at the heart of the debate are by now familiar to those who have been following it. Since the shale gas revolution took hold in North America, some six to seven years ago, the dynamics of natural gas markets around the world have changed in radical ways.
US LNG turnaround: As the US moved from potential major importer of LNG to potential major exporter – surely one of the biggest turnarounds in industrial history – wide regional gas pricing disparities have emerged. Asian buyers now pay several times more for their gas than do consumers in the US, with Europe somewhere in between.
North American prices are market-based, those in Europe are moving from being primarily oil-linked to being primarily hub-linked, while prices in Asia remain stubbornly oil-linked – at least for now. Little wonder that one of the biggest talking points at Gastech was the potential for large-scale exports of LNG from the US – where the shale revolution has kept prices stubbornly low – to make available cheaper supplies of gas for buyers in Asia.
Amplifying these regional price disparities have been the nuclear problems faced by Japan and, to a lesser extent, Korea, and the rapid growth of demand in new Asian markets – mainly, but by no means solely, China.
Japan, still by far the world’s biggest LNG buyer, now has a major balance of payments problem – one of the main causes of which is the high cost of its imported energy – and its political leaders are increasingly concerned about the impact of gas pricing disparities on industrial competitiveness.
Cost escalation: Meanwhile, the big LNG sellers argue that LNG will only be available in sufficient quantities to meet expected fast-growing demand if prices are at levels that can sustain new supply projects. And the past decade has seen rapid escalation of LNG project construction costs, which has contributed to growing interest in the potential for floating LNG (FLNG) projects – another big theme at Gastech – to reduce costs, or at least make them more predictable and controllable.
Opening the conference, Seok-hyo Jang, the President and CEO of Kogas, the single largest LNG-buying entity in the world, spoke of LNG demand by the mid-2020s being 50% higher than today. “Ultimately though,” he added, “growth in gas consumption in the emerging markets will depend on the affordability and stability of gas prices.”
He was followed by Yoon Sang-Jick, Korea’s Minister for Trade, Industry and Energy, who said: “The North-East Asian market has been burdened by inflexible contract conditions and rigid pricing practices. As a result consumers in this region have been paying a so-called ‘Asian premium’ . . . We must address this issue and allow gas to be traded more favourably . . . Specifically, the current oil indexation of gas prices and destination clauses are the two most urgent matters for improvement.”
Buyers and sellers ‘getting blurred’: The changes in behaviour of the big Asian LNG buyers are nothing short of radical, to the point that, as one speaker put it, “the lines between buyers and sellers are getting blurred” – a reference to the fact that several Asian buyers have been taking big stakes in LNG supply projects, notably in Australia and North America. This is a big change to the long-established practice of buyers taking a very small stake in projects they have contracted supply from, as a way of gaining access to information they would otherwise not be party to.
Buyers have also been taking substantial stakes in the upstream, particularly in North American unconventional gas plays.
Another significant shift, noted by Noel Tomnay of consultancy firm Wood Mackenzie, is that relatively few oil-linked long-term contracts have been signed recently by Asian buyers. “When I was looking at just how much Asian LNG demand has been firmly secured through new contracts with end-users since the last Gastech conference 18 months ago, I could only find 5 mtpa.”
Perhaps the sternest warning from a supplier about how current trends are affecting the LNG business came from Martin Houston, former Chief Operating Officer at BG Group. He spoke of the “three I’s – indecision, inertia and indexation anxiety”.
“These are states of mind which we are seeing in the minds of traditional buyers, which I believe are leading to some atrophy in the business today . . . These mind-sets are quite understandable. Buyers are trying to juggle the quest for so-called ‘cheap LNG’ whilst balancing security of supply [and a range of other factors]. . .
“The industry’s chasing its tail in Asia at the moment. We’ve got this logjam that’s got to broken . . . LNG will be shorter for longer than most people are imagining.”
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