Asian LNG buyers hope US projects can lower premiums

Sharp increase in production capacity expected to boost exports but analysts warn that a drop in prices will be slow amid rising demand

PUBLISHED : Friday, 18 October, 2013, 4:31am
UPDATED : Friday, 18 October, 2013, 4:31am


Asian buyers of seaborne liquefied natural gas, including state-backed companies in China, hope newly approved export projects in the United States will pare big premiums they are forced to pay.

But sellers and analysts said any narrowing of the yawning price gap between Asia and North American prices would be slow, citing rising demand, time and rising costs to build the necessary infrastructure to allow such exports to become reality.

The US government last month approved the nation's fourth LNG export project in two years. Three projects were approved this year. The four projects have a combined annual capacity of 51 million tonnes.

Washington took nearly two years to review applications after the first one was given the go-ahead in 2011 amid intense debate over whether the country's new-found gas wealth should be kept for domestic consumption or exported.

Several dozen LNG import projects were proposed only a decade ago amid tight supply.

Now about two dozen export projects have been proposed, as technological breakthroughs resulted in rapid growth in domestic output of gas trapped between shale rock formations.

Thanks to well-established pipeline and storage infrastructure and liberalised trading, the US has highly competitive and active spot markets led by the Henry Hub in Louisiana.

The surplus of gas, courtesy of the so-called "shale gas revolution", saw Henry Hub's price fall to US$3 to US$4 per million British thermal units (mmbtu) this year from almost US$13 in 2008.

In East Asia, rising income and a desire to cut pollution from the burning of coal and oil saw a rapid rise in LNG demand.

Global energy major Royal Dutch/Shell chief executive Peter Voser told the World Energy Congress that Asian LNG demand was projected to surge from 140 million tonnes this year to 500 million tonnes in 2030.

According to a Credit Suisse research report, Asian buyers are paying about US$15 per mmbtu on long-term supply contracts with prices partially linked to that of crude oil, compared to US$4 in the US spot market.

After deducting procurement, liquefaction and shipping costs, buyers are paying an "Asian premium" of about US$4 per mmbtu, it said.

The brokerage's analysts forecast the premium to fall to US$2 by 2020, when they are expected to pay US$13 per mmbtu, after several US export projects come on stream.

They expected a premium to remain because they estimated about 70 per cent of US exports destined for Asia to be under the control of major players, which are already supplying Asia under contracts with price review clauses.

The suppliers, BG, Shell, BP, Mitsubishi and Mitsui, have "a vested interest in maintaining the Asian price premium", the analysts said.

Asia accounts for two-thirds of global seaborne LNG purchases.

Jang Seok-hyo, the chief executive of Korea Gas, the world's largest LNG importer, said the prospect of US exports helped some Asian buyers to sign contracts with partial indexation to Henry Hub prices.

This resulted in price cuts of as much as 30 per cent compared to previous crude oil-indexed contracts, he said.

But according to the Credit Suisse analysts, one such contract carries a term that allows 30 per cent of the supply volume linked to Henry Hub price, but on an "interruptible basis".

This gives the seller flexibility to resell the volume to another buyer and carries extra risk for the buyer.

Meanwhile, Voser warned that LNG projects, which involve the construction of liquefaction plants, specialised ocean-going tankers and receiving terminals, were prone to rising costs.

"None of these energy projects is cheap or easy to build … there is competition of human and physical resources needed to build them," he said. "I'm very concerned we are marching towards a shortage of technical skills given the investment levels that we have and given the ageing technical [staff]."

The Credit Suisse analysts pointed out that most LNG projects in the US are built in Texas and Louisiana, where engineering employment is approaching prior peak levels seen in 2008.