UPDATE 1-Asia spot LNG dries up as suppliers ship to Japan

Wed Mar 16, 2011 3:21pm EDT

Related Topics

* Japanese utilities bypass spot market

* Spot prices steady at $10-11 mmBtu (Adds trader quote on spot deals, apargraphs 7-8)

By Rebekah Kebede

PERTH, March 16 (Reuters) - Asia's spot liquefied natural gas (LNG) market has dried up this week as producers earmarked extra cargoes for Japanese utilities, rather than put them up for spot sale.

About a fifth of Japanese nuclear power plant capacity, or 9,702 megawatts, was shut after a massive earthquake last week, which analysts have predicted will mean a surge in Japan's LNG demand. [ID:nL3E7EE025] [ID:nL3E7EF1CF]

But utilities in Japan, the world's largest importer of LNG, have been in talks directly with suppliers, by-passing traders and brokers in the spot market, to maximise their long-term contracts and land swap deals in an effort to stave off spot price hikes, traders and analysts said.

"Once you start talking to traders, they'll start pushing the prices up... (looking in the spot market) is the last thing they will do," Tony Regan, an analyst at Tri-Zen Capital said.

Spot LNG prices rose to $10-11 per million British thermal units (mmBtu) this week, up from under $10 per mmBtu before the quake, a modest rise which market watchers said might not accurately reflect increases in demand from Japan as utilities are dealing directly with producers. [ID:nN14180773]

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Japan's biggest LNG suppliers:r.reuters.com/mep58r

Japan quake impact on energy: [ID:nL3E7EE2EU]

Japan's unfolding disaster: r.reuters.com/mak58r

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Qatar's Rasgas said on Monday it was in talks with Qatargas to offer more gas to Japan and Russia have each pledged some LNG to help fill the supply gap, with South Korea agreed to swap cargoes for March and April. Taiwan is also said to have agreed to cargo swaps with Japan. [ID:nLDE72D0TC] [ID:nLDE72B0H1] [ID:nTOE72D03S]

One source said that Australian producers had taken some cargoes earmarked for future spot sales off the market to instead send to Japan.

"The deals are done at a very high level so there are no traders' negotiations or offers," one European LNG trader said. "No one really knows what the price is. These deals are with long term suppliers and sometimes from government to government," he added.

Companies have also entered the fray, with Royal Dutch Shell (RDSa.L) saying it had agreed to ship a first cargo to Japan. [ID:nLDE72E0PA]

"Supply has been earmarked... I wouldn't expect, particularly given the shipping and production capacity that Qatar has, that Japan would have a shortage of LNG," one Singapore-based trader said.

On Wednesday, TEPCO said it was gathering information on two possibilities for procuring its required energy. "We are seeing two possibilities -- boost the amount of purchases now from long-term contracts and buy in the spot market," a TEPCO spokesperson said. The spokesperson said there were some contracts concluded since the quake on Friday, but would not disclose details.

BOOSTING LONG-TERM CONTRACTS

Japanese utilities typically have long-term LNG supply contracts with some degree of flexibility built in for minimising and maximising offtake.

With the nuclear crisis underway, Japanese utilities are negotiating to boost their offtake from long-term contracts and producers are largely trying to meet their needs, traders and analysts said.

"Everybody is trying to step up to help them in a dire situation," said Di Brookman, an analyst at CLSA in Sydney, adding that suppliers were making an effort to cap prices.

"Nobody's trying to make money on this... the amount of gaming that is going on is quite low," she said.

But the spot market may come to reassert itself soon.

"There will be a time when a lot of inventory is dealt with and the buyers have less capacity to swap, and that's when the spot market will come back to the fore again," Brookman said.

GIVING FACE TO THE BIGGEST BUYER

The current generosity of the LNG producers is not without a payoff -- as part of an expanding market, LNG producers are also invested in showing that they can handle any additional demand.

"The whole industry has got to demonstrate that it can handle this well and that they are not overstretched," Regan from Tri-Zen Capital added.

Supplying Japan with LNG in the short-term may benefit producers, especially if they value a long-term customer, which imported 70 million tonnes of LNG in 2010.

"Japan is the biggest buyer and you should always be polite to your biggest buyer," Regan said. (Additional reporting by Chikako Mogi and Edward McAllister in New York; Editing by Ramthan Hussain)

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