[ET] Asia-Pacific Sees Premium Long-term LNG Deals (Sep 28, 2009)

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Asia-Pacific sees premium long-term LNG deals

28 Sep 2009, 0015 hrs IST, Ramkrishna Kashelkar, ET BureauNotwithstanding the crash in natural gas prices and low prices of liquefied natural gas (LNG) inthe spot market, fresh long-term deals in theAsia-Pacific region are being struck at very high prices.Last month, Petronet LNG announced a tie-up for 1.5 million tonne of LNG from an Australiancompany for its upcoming Kochi terminal. Although none of the parties have officially declared theprices, the 20-year contract is reportedly valued at $20.5 billion, which translates in a price of $13.5 per million metric British thermal units (mmBtu).“Prices in the spot market and long-term contracts, which are typically for 20-25 years, are notcomparable,” said Amitava Sengupta, finance director at Petronet LNG, India’s largest importer of LNG.“Spot prices are currently low due to the economic downturn, however, they will pick up sooner or later,” he said, adding that prices will rise further as long-term LNG demand is expected tooutstrip supply. In India, gas prices have been hugely controversial because of the disputesbetween RIL and NTPC and RIL and RNRL. Domestically-produced gas costs in the range of $1.8 -$5.5 per mmBtu.The value of long-term contracts for Australia’s Gorgon LNG project, signed recently by its threeconsortium members — Chevron, Exxon Mobil and Shell — is estimated to be $200 billion. The15-MT per annum LNG project is expected to come up in western Australia by 2014 at anestimated investment of $37 billion.The US Henry Hub natural gas prices have dropped over 33% since the beginning of 2009 to$3.45 per mmBtu, a period when the crude oil prices more than doubled. At the same time, thespot LNG cargoes, which had scaled up to $19-20 per mmBtu last year, have come down to $4-5levels currently.In the Asia–Pacific region, where nearly 90% of the international trade in natural gas happens byway of LNG, demand for LNG far outstrips supply and it is purely a seller’s market. It has beenworsened due to a clutch of dominant buyers, including Japan, South Korea and Taiwan, whichtogether consume 62% of world’s LNG, bidding aggressively for future supplies.“Japan, which is importing LNG since 1969, has a number of LNG import deals struck at prettylow-prices 5-10 years back when the crude oil prices were very low. As a result, the aggressivepricing of the current contracts hardly adds to their overall gas cost,” said a high-ranking officialwith a national oil company.As a result, the relatively smaller LNG consumers in the region, such as India, have to accept thehigh prices in order to secure future energy supply. The US and European countries, where thenatural gas imports take place predominantly through pipelines, import LNG only to meet their peak demand, and hence, are not affected by the spike in LNG prices. The key question iswhether Indian consumers would buy gas at such steep prices.“Today, the new long-term LNG contracts are linked directly to the crude oil representing around14%—16% of the per barrel prices without any floor or ceiling limits. Even though this appearsvery high in the current scenario, LNG is still cheaper compared to the liquid fuels, such asnaphtha or oil, and beneficial to the final consumer. Hence, we are not worried about itsmarketing,” said the official from the national oil company.In simple terms, with benchmark crude oil prices at $70 per barrel, LNG will cost around $9.8 –11.2 per mmBtu on FOB basis, depending on the pricing formula agreed upon in individualcontracts. It will rise to $14–$16, if the benchmark crude prices rise to $100 a barrel. Japan, being

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