September 10, 2013 / 12:43 PM / 6 years ago

European, Asian LNG buyers teaming up to push cheaper prices

TOKYO, Sept 10 (Reuters) - Gas buyers in Europe, Japan and other parts of Asia are teaming up to reduce the price of liquefied natural gas (LNG), which officials say is threatening a recovery in the European Union and growth in the Japanese economy, the world’s third largest.

At a conference in Tokyo on Tuesday, LNG buyers used some of their most forceful language yet to push suppliers to delink gas prices from oil and free up contracts that prevent consumers from re-selling cargoes because of destination restrictions.

But sellers aren’t budging, with big oil majors like Chevron Corp and Exxon Mobil Corp insisting that multi-year supply contracts in their current form are necessary to ensure they can take on the risk of developing projects that take years to build and cost billions of dollars.

Some gas sellers warned that there would be a shortfall of as much as 150 million tonnes by 2025 unless projects get the investment needed to extract gas from the ground. With massive supplies becoming available in the United States and offshore Mozambique in Africa, though, buyers have become bolder.

“The practice of oil-linking has no relevance ... and is largely responsible for such abnormally high prices,” said Indian Oil Minister M. Veerappa Moily.

“Transition away from the oil-price indexation is a necessary precondition for a competitive market,” Moily said.

LNG is expensive in Asia, fed partly by Japan’s need for fuel to run power stations after most of its nuclear plants were shut following the 2011 massive earthquake.

Asian prices are now more than four times the cost of natural gas in the United States, where a boom in shale oil and gas is taking place. Asia LNG is now about $15 per mmBtu versus $3.60 per mmBtu for U.S. piped gas.

As a result, Japan - the world’s biggest LNG importer - had its first trade deficit last year since the second oil shock 31 years ago, Japanese Trade Minister Toshimitsu Motegi said in a speech to open the second producers and consumers conference.

In Europe, high gas prices are placing a question mark over an economic recovery after the financial crisis pushed unemployment up and threatened social stability, while forcing a shift to coal and making emissions targets unrealistic.

The average price of spot pipeline gas in Europe is around $10 per mmBtu against an average spot LNG price of $11.40/mmBtu.

PARTNERSHIPS ON PRICING

Japan and the European Union say they will promote studies on LNG pricing with an aim to reducing prices, according to a statement from the Japanese government and the Directorate General for Energy of the European Commission.

That came a day after Japan and India, the world’s fourth-biggest LNG buyer, signed an agreement to study joint procurement of supplies.

“We are witnessing an expansion in cooperation among LNG-consuming nations who share the sense of crisis,” Motegi said.

Buyers, though, say that what looks like a surplus of supply now will not be sufficient to meet demand if prices do not keep pace with development costs.

Demand is forecast to outstrip supply as Southeast Asian and South American countries are turning to gas to power their economies. That will mean less LNG for export from such long-time traditional suppliers as Malaysia and Indonesia.

Global LNG demand is forecast to double by the year 2030 from around 240 million tonnes per year now, Joe Geagea, president Chevron Gas and Midstream, said.

Meanwhile, liquefaction costs have risen in multiples.

The 84 million tonnes a year of capacity currently under construction will cost a total of $230 billion or about $21 billion per export project, according to Rob Franklin, President, ExxonMobil Gas & Power Marketing Company.

“Depending upon how you measure it, the costs have gone up by a factor of at least three and closer to four over the last very few years,” Franklin said.

“The reality of life is that costs of implementing LNG projects have gone up faster than the price of LNG,” he said.

That isn’t cutting it with buyers.

Tokyo Gas said its plans to increase natural gas fired power generation by the year 2020 to around 3 to 5 gigawatts are under threat because of the rising prices.

“At current LNG pricing levels, I would have to say these targets will be hard to achieve,” President Tsuyoshi Okamoto said at the conference.

“The magnitude of dissatisfaction among end-users with gas prices is becoming more apparent day by day as the growth in sales slows in Japan,” Okamoto said.

Qatari energy minister Mohammed Bin Saleh Al-Sada and other suppliers countered that there was a risk that gas would stay in the ground unless there was the certainty of long-term contracts.

“It is true that Asian buyers want to see a shift from an oil-linked pricing structure in future long-term supply contracts and desire to introduce some spot index-component in pricing,” Al-Sada said.

“LNG producers will find it difficult to take the price risks that are associated with remote market indexes which reflect fundamentals and policies that have no relevance whatsoever to the Asian market,” he said.

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