The controversy over LNG pricing in Asian markets shows no sign of abating, judging by the heartfelt discussions between producers and buyers at this month’s World Energy Congress (WEC) in South Korea.
There are, however, signs that the debate is becoming more sophisticated – moving on from simple discussion of current price differentials between markets in Asia, North America and Europe towards greater emphasis on diversification, portfolio management and optimisation, long-term pricing risk, and the continuing need to underpin the financing of costly liquefaction plant to ensure future supply.
That said, the gulf between producers and Asian buyers appears wide. In separate debates at the WEC, executives from two LNG suppliers, Peter Coleman, CEO of Australia’s Woodside, and Martin Houston, chief operating officer of BG Group, both used the phrase “there is no such thing as cheap long-term gas” (Houston’s actual words were: “we do not fundamentally believe that there is any such thing as cheap LNG”).
Understandable, perhaps, coming from Coleman, given the high and rising costs of most Australian LNG projects, but less so coming from BG, given its interests in relatively cheap liquefaction capacity in the United States. In its strategy presentations to analysts and journalists, BG makes no secret of the fact that it intends to sell Henry-Hub indexed LNG sourced from the US to Asian buyers at oil-linked prices as part of its portfolio-based trading model.
Unhappy about the “The Asian premium” Meanwhile, buyers continue to argue against what Seokhyo Jang, CEO at Korea Gas Corporation (Kogas), the world’s largest LNG buyer, described in Daegu as “the Asian premium”. Asian buyers appear to be getting increasingly frustrated not just because they believe they are paying unreasonably more than gas consumers in North America and Europe, but also because they have seen how price-formation mechanisms have been changing in Europe.
The debate covered a wide range of issues. At a conference session that brought together ConocoPhillips, Tokyo Gas, Woodside, Pertamina (now both a seller and buyer of LNG) and ExxonMobil, Coleman stressed that, while the LNG business was going through an extended period of change, the fundamentals that have historically driven the business still hold:
“The fundamentals have been driven by long-term relationships between buyers and sellers, particularly in the Asian market over the last 30-40 years. It’s fundamental that the investor who’s taking development risk needs certainty. And it’s not just development risk around a project that goes to final investment decision (FID) but it’s also the exploration and research risks that go into that.”
He went on to defend oil price indexation, still the dominant price-formation mechanism in long-term Asian contracts: “The buyer wants certainty of supply, they want some certainty with respect to the price range they’ll get, so historically what’s been able to make the two of those work has been an oil linkage – because it’s been a predictable, fungible, widely traded commodity, and it’s often linked to GDP.”
Undoubtedly, the main driver of the debate has been the growing dissatisfaction of Asian gas buyers who are paying $15/MMBtu or more for their gas while consumers in the US pay less than $4/MMBtu. This dissatisfaction has grown as it has become clearer that the US is undergoing an industrial renaissance, while post-Fukushima Japan is struggling with a growing trade deficit, largely linked to the prices it is having to pay for energy imports.
Attracted by a 30% discount: Even allowing for the costs of liquefaction, transportation, regasification and a margin for LNG producers and traders, Asian buyers such as Shigeru Muraki, vice-president at Tokyo Gas, are attracted to sourcing Henry Hub-linked LNG at perhaps $10-11/MMBtu, a 30% discount to what they are currently paying.
This inevitably leads to questions about how much US LNG will actually be exported, given that only one such project is under construction, and what the long-term trajectory of Henry Hub prices might be.
Richard Guerrant, global vice-president for LNG at ExxonMobil, said Henry Hub prices could not be relied on to stay at current levels:
“The North American market is a very efficient traded market. The long history of natural gas supply and demand balances in the US, and Henry Hub price cycle, tell us that average Henry Hub gas price over the long term equals the cost of supply plus a reasonable return for the investor. Today Henry Hub prices are in one of the low price cycles and below replacement cost. If history is any indication, this cannot be maintained over the long term, since the gas produced from liquids-rich plays is not enough to meet long-term gas demand in North America.”
Diversification, diversification: Muraki accepted that Henry Hub prices could rise while oil prices – and therefore oil-linked LNG prices – could fall. He nevertheless said:
“In the new dynamics of the Asian LNG market, the key word is diversification. Diversification of supply sources – many potential new sources are planned, such as US, Canada, Alaska, Mozambique, and East Siberia – we’d like to promote those new sources and diversify sources and contractual conditions to optimise our portfolio . . .
“Contractual conditions will be diversified in terms of the pricing. New price indices such as Henry Hub and NBP will emerge. Oil-indexed gentle slope and S-curve will be re-introduced, to reduce volatility, which is more attractive for consumers, and to secure the long-term return for producers.
“A portfolio of long-term, short-term and spot contracts, as well as destination flexibility, will lead to increasing liquidity of the LNG market. Then LNG traded markets will be developed and an Asian hub will be – possibly – created. Trading and arbitrage between the Pacific and Atlantic markets will be promoted. Those dynamics will enhance the competitiveness of natural gas in the fuel mix and promote the utilisation of gas.”
It is still too early to predict how this debate will play out – but it is hard to escape the feeling that some kind of genie has escaped its bottle.
by Alex Forbes, Daegu, South Korea
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