--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 11 "Who blinks
first?" was the question asked by the International Energy
Agency (IEA) of the price showdown between Asian buyers of
liquefied natural gas (LNG) and their global suppliers.
The IEA was seeking an answer to which group has the most
power: the buyers who want lower LNG pricing as well as
flexibility and diversity of supply, or the producers who need
guaranteed high prices for long-term contracts to justify the
capital investment in building new plants.
While the IEA's Medium-term Gas Market Report, released on
Tuesday, is probably correct in saying the issue has yet to be
decisively settled, the answer is already largely known.
The buyers are likely to win in the short to medium term as
the wave of new LNG supply, largely from Australia and the
United States, comes to market, thus easing the current
tightness and boosting competition among producers.
But buyers are equally likely to lose in the longer term,
beyond 2020, as new LNG projects are going to struggle to obtain
the necessary financing and simply won't get built.
However, it's neither buyers or suppliers of LNG that will
blink first, rather it's bankers and they are already treading
cautiously and are unlikely to lend the billions of dollars
needed for new projects, unless a high price is guaranteed.
The IEA expects natural gas demand growth in the next five
years to be led by Asia, with the region consuming an additional
250 billion cubic metres (bcm) by 2019.
This will be led by China, where demand is expected to
double to 315 bcm.
While increased domestic output and pipeline from Russia and
central Asia will bolster Chinese supplies, the IEA still
expects LNG to make a significant contribution.
About 100 bcm of additional LNG demand will come from Asia
in the next five years, a gain equivalent to about a third of
the total LNG market of 322 bcm in 2013.
The 100 bcm of additional LNG required can be mostly met
from the plants that are already under construction.
Australia's seven LNG projects currently being built will
deliver 61.8 million tonnes per annum, equivalent to about 84
bcm, while Cheniere's Sabine Pass, the only U.S. project being
built, will add 24.4 bcm.
Other new projects in Russia and Africa will ensure that the
LNG market will at worst be balanced and most likely will have a
small surplus in the next five years.
NEW APPROVALS NEEDED
However, as the IEA points out in its report, LNG demand
won't suddenly stop growing in 2020, and given the lead time of
at least five years, projects will have to get approval soon in
order to start up from 2020 onwards.
Since the wave of approvals in Australia for current plants,
there has been a dearth of new final investment decisions, with
the IEA pointing only to Yamal LNG in Russia.
Australian LNG producers have been arguing in recent months
that the country will miss out on the next round of approvals
unless costs can be cut.
Even if labour and regulatory costs do come down, it's still
questionable as to whether greenfield LNG projects can get a
green light, and not just in Australia.
The $400 billion deal between Russia and China to supply 38
bcm of natural gas a year has been widely interpreted as setting
a new benchmark for what the Asian market can pay for gas.
Although the price wasn't disclosed, sources have put it at
around $10 per million British thermal units (mmBtu), close to
what Russia receives for supplies sent to Europe.
However, this is well below the LNG price in Asia, with spot
currently at $13.10 per mmBtu, a level likely close to the
seasonal low. The peak so far in 2014 was $20.50 and an average
of around $16-$17 for the year seems likely.
If LNG buyers insist on prices more closely aligned to the
Russia-China deal, or to U.S. Henry Hub, they may well be
successful in driving costs down as producers compete to sell
However, any success in lowering LNG costs will merely
ensure that new projects don't get built, as a delivered to
China price closer to $10 per mmBtu would likely render even the
planned plants in the United States uneconomic, despite the
lower cost of their shale gas feedstock.
While all LNG buyers say they want lower prices, it may turn
out that in the longer term the smart buyers are those that are
still prepared to pay more for secure multi-year contracts,
especially for deliveries after 2020.
(Editing by Joseph Radford)