LONDON, Oct 8 (Reuters) - Liquefied natural gas (LNG) will continue to be benchmarked to oil prices for several more decades, outgoing BG Group Chief Executive Frank Chapman said on Monday, despite complaints by top Asian importers that supplies are unaffordable.
Long-term, oil-indexed contracts will remain the cornerstone of security of supply for Europe and Asia, given its growing dependence on supply from only few foreign gas-producing sources, Chapman said during a gas conference speech in London.
Chapman, who heads one of the world’s biggest LNG trading firms, said that long-term LNG supplies will only ever be priced against the fundamentals of supply and demand of gas once spot markets for the fuel become more liquid and transparent.
“I don’t see that anywhere close in the LNG market now, and it will take decades for it to happen,” he said.
“If you want a fully liquid market you must have many sources of supply and many sources of demand,” Chapman said.
“You need somebody to build a merchant plant, a merchant importer and the existence of a defined end-user that you can sell to,” he said.
The LNG market is dominated by heavyweight producers Qatar, Algeria, Nigeria and Australia who predominantly fix supplies in long-term contracts tied to oil prices.
Volumes from liquefaction plants are sold largely as part of long-term deals, with minimal volumes reserved for spot trade on a merchant basis.
Producers have defended the practice of selling LNG linked to oil prices amid a growing backlash by consumer countries who want the fuel to reflect fundamentals specific to oversupplied and comparatively cheap gas markets.
Top importer Japan amassed a record trade deficit in the first-half this year partly due to a surge in oil-indexed LNG imports following the closure of nuclear power plants after the Fukushima disaster in March 2011.
Tokyo Gas Chief Executive of Energy Solutions Division Shigeru Muraki warned that LNG will have to compete with other fuels including cheap coal and oil if prices stay at current high levels.
“The current price linked to oil is currently $17 (per million British thermal units),” Muraki said, adding that Japanese utilities will prioritize purchases of much cheaper U.S. gas exports once they come onto the market.
Booming shale gas output in the U.S. has opened up vast new reserves that companies hope to export from 2015 in the form of LNG.
Cargoes exported from U.S. terminals would be linked to cheap domestic Henry Hub prices plus a small premium which nevertheless is heavily discounted to prevailing global LNG prices.
Consumer countries hope that this new source of cheap LNG supply will help to undermine existing oil-indexed price mechanisms by making them less competitive.