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Exclusive: Asian buyers of U.S. LNG dial back as exuberance dims
September 19, 2014 / 11:47 AM / 3 years ago

Exclusive: Asian buyers of U.S. LNG dial back as exuberance dims

A worker walks atop a tanker wagon to check the freight level at an oil terminal on the outskirts of Kolkata November 27, 2013. REUTERS/Rupak De Chowdhuri

MILAN (Reuters) - A looming gas glut worldwide is prompting Japanese and Indian firms to resell to European traders and utilities big chunks of U.S. liquefied natural gas they had committed to buy several years ago, signaling tempered enthusiasm for U.S. energy.

The chance to ship LNG from the United States, where natural gas output is booming, was touted as the solution to Asia’s soaring energy needs and mounting fuel import bill -- and firms rushed in to grab a slice of the affordable action.

But after splashing out billions of dollars to build numerous plants to liquefy and export the gas by ship, at least three buyers spooked by the scale of their commitments and risks of heavy financial losses want out, in part.

Moves to sell off supply are likely to boost global spot market liquidity as trading houses vie for the business and challenge the historical dominance of the oil majors.

Japanese utilities Tokyo Gas (9531.T) and Osaka Gas (9532.T) as well as India’s Gail (GAIL.NS) are dialing back on their U.S. LNG commitments via stake sales after realizing they cannot handle the initial surge of volume due to low demand at home.

“The large volumes they have taken on are a risk in the near term, but they make sense in the longer term as gas demand across the region will grow,” an industry source said.

More critical, they sense that overexposure to U.S. gas markets could prove costly after a recent run-up in prices showed how the fuel’s global competitiveness could be eroded.

All three players have tapped European trading houses, energy firms and utilities, including Germany’s E.ON (EONGn.DE),

to take some of the LNG off their hands through five-year sales deals, sources from the companies approached have told Reuters.

“Most of these Far East players are realizing they cannot handle exposures to the U.S. Henry Hub (gas price) and now want to get rid of supply,” said a trading house source whose company was approached by one of the sellers.

Falling crude oil prices have sharpened anxieties about the cheapness of U.S. LNG as many existing long-term gas supply deals in Asia reflect the price of Japanese crude imports.

With oil slipping below $100 a barrel, LNG deals linked to these prices become more attractive relative to U.S.-gas price linked LNG, which has rebounded in recent years, traders said.

Still, a true danger level for U.S. LNG kicks in only if oil falls to $80 a barrel, seen as unlikely in the years ahead.

TRADERS SEE OPENING

The global LNG market has historically been dominated by oil majors including Shell (RDSa.L), BP (BP.L) and BG Group BG.L hoarding supply and limiting access to new entrants, such as trading companies, whose arrival on the scene in recent years has renewed hopes of a growth spurt in spot trading liquidity.

While trading giants such as Vitol, Trafigura and Gunvor have established themselves as a force in LNG, helped by the gradual exit of U.S. banks, they have not challenged the majors for market share as they did in crude oil trading in the 1970s.

Opportunities like the current one provide space for such maneuvering, say industry, company and trade sources.

“The trading houses are looking at this as an opening,” a source from another approached European company said.

SELLING STRATEGIES

Tokyo Gas, which bought 1.4 million tonnes per annum of LNG over 20 years from U.S. East Coast project Cove Point, has offered to sell over half, or 0.75 million tonnes/year, to at least one southern European energy firm, a source there said.

Its offer for a five-year supply deal was rejected due to the high price pitch, significantly above what it paid project developer Dominion Resources (D.N) for LNG due to begin exports in 2017.

Part of the problem for Japanese players is that steps towards gas market liberalization at home make it hard to know how much gas utilities will need going forward, traders there said.

Following suit, Osaka Gas is offering five-year deals to Europeans and others from its 2.2 million tonne/year (1 tonne = 1.102 metric tons) position at the Freeport facility, in Texas.

The mark-up varies between sellers but in one case is at least $1 per million British thermal units (mmBtu) -- a reference term used to express LNG prices -- above what it initially paid, a source with knowledge of the matter said.

Buyers of LNG export capacity in the projects cited above paid 15 percent above the benchmark U.S. Henry Hub gas price, currently $4 per mmBtu, plus a premium of $3-$3.20 per mmBtu, regulatory filings show.

A Tokyo Gas spokeswoman and an Osaka Gas spokesman declined to comment.

India’s Gail, by far the biggest U.S. LNG buyer of the three, is offering 1 million tonnes per annum for its first five years of supply from the Sabine Pass project on Louisiana’s Gulf Coast, sources with knowledge of the matter told Reuters.

Company officials were not reachable on Friday, but Gail in the past has stated its aim to trade some of its U.S. LNG.

Deliveries from Cheniere Energy’s (LNG.A) Sabine Pass project are due to start in 2016. Gail has also signed up for 2.3 mtpa from Cove Point.

“Gail is offering cargoes from its Sabine Pass position -- nobody wanted their Cove Point supply since the Gulf Coast terminal is attractively positioned closer to South America and the Panama Canal,” which provides a short-cut to lucrative Asian markets, an industry source said.

In a sign of the potential cost escalation for U.S. LNG as it gets resold between companies, Gail at first demanded of buyers a $1.5 per mmBtu premium to the price it agreed to pay terminal developer Cheniere, the source said. It also wanted to sell the supply for a 15-year period, not five.

Roundly rejected by buyers, it changed tack by lowering its asking price and term offer to attract bidders.

A tender launched by Gail to sell the LNG will close this month, the industry source said.

Additional reporting by James Topham and Aaron Sheldrick in Tokyo, and Edward McAllister in New York; Editing by Dale Hudson

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