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US LNG set to change price framework

Asian liquefied natural gas buyers expect oil-link transition

Asian liquefied natural gas (LNG) buyers expect US exports to spur the change from traditional oil-index priced contracts to include a larger gas hub element, according to the Japan Oil, Gas, and Metals National Corporation (Jogmec).

The traditional Asian buyers – comprising Japan, South Korea, and Taiwan – have bought long-term LNG on prices linked with oil for over 40 years. But with the US planning to build a number of LNG export facilities, Asian importers have rushed to sign contracts because they are either linked to US Henry Hub gas prices or are tolling agreements where the shipper buys the gas at market prices themselves and pay a liquefaction fee.

“Since US projects are based on the US market price, Asian buyers expect a partial change in the LNG formulas,” Jogmec research director general Takashi Yoshida told the World National Oil Companies Congress in London. “With the commencement of LNG exports from North America, some market price functions could be adopted.” 

Over the last three years, oil prices have risen sharply. However, while hub prices in Europe have remained relatively flat, US gas prices have slumped due to the shale gas boom. Asian LNG spot prices rose to four-year highs of $18 per million British thermal units (Btu) in early June, while US gas fell to a decade-lows of under $2/m Btu at the start of 2012.

While Japanese buyers claim there is no reason for LNG to be linked with oil,  LNG producers refute that, saying an oil-link is needed to ensure returns on expensive, long-term projects.

But only one out of seven US liquefaction projects has federal government approval to ship LNG to Japan. This has raised concerns that officials in Washington DC may move to curtail exports, channelling the gas, instead, to the domestic chemical and manufacturing sectors.

The Japanese government is lobbying the US government to allow more projects to export LNG, but Yoshida speculated that a decision may not be made until after the US presidential election in November.

And as Japan turns away from atomic energy after the Fukushima nuclear meltdown, companies have been investing billions in overseas gas and LNG projects to help secure supply.

“Several Japanese companies are already involved in shale gas and CBM (coal-bed methane) projects in North America as well as Australia. Many of these could be developed into LNG export projects to Japan,” he said.

“Jogmec hopes to facilitate the diversification of gas supply to Japan, which could help secure a stable supply at a lower price.”
In the past 12 months Jogmec has provided financial support for a Japanese consortium buying a stake in the Wheatstone LNG development, in Australia, as well as for Mitsubishi’s Cordova Embankment shale-gas project in British Columbia, Canada.

Yoshida also told the conference he expected some gas from Tanzania and Mozambique to be exported to Japan. East Africa is being touted as a new LNG hotspot following a raft of major gas finds in the region’s offshore.

Japan’s long-term LNG demand is expected to rise, in the wake of the shut-in of the country’s 54 nuclear reactors earlier this year. The move was prompted by the meltdown at the Fukushima Daiichi reactor after the earthquake and tsunami in March 2011. LNG imports for 2012 alone are expected to jump by about 23% to 86.6 million tonnes compared to pre-quake volumes, according to LNG Insight analysis. 

Although some reactors may restart, Japan’s long-term LNG demand is expected to rise as gas-fired power plants replace nuclear power.

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