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Chinese LNG buyers hold off

Low domestic gas pricing restricts spot cargo purchases

SPOT Asian liquefied natural gas (LNG) prices firmed this week on pre-summer stockpiling, with China still on the market sidelines due to high prices.

Sellers were asking for around $13.75/m British thermal units (Btu) this week, slightly higher than $13.25/m Btu for deals last week, market sources said, with Japanese utilities building up inventories ahead of an expected summer demand spike.

China was expected to commission a number of new LNG terminals this summer, but is yet to start buying spot cargoes as domestic gas prices are too low compared to global LNG prices.

“Prices are keeping China on the sidelines as domestic prices haven’t gone up. Buyers would lose money if they bought spot LNG,” Tony Regan, LNG principle at consultancy Tri-Zen, said.

He estimated that Chinese domestic gas prices needed to increase by 30% for China to start buying spot LNG or else it would be uneconomical to import the super-cooled fuel. Although some areas such as Guangdong have always used international LNG prices due to low local production, most provinces have gas prices set by the government.

“The Chinese are fighting inflation, so it could be a few more months before there’s a gas price rise,” Regan said. But China did increase domestic power prices by roughly 3% for non-residential users from 1 June, with the country facing a 40 gigawatt electricity shortfall this summer. Although the country relies mainly on coal for electricity generation, it could tempt some utilities into buying LNG.

But they may hold off until domestic prices rise or LNG prices fall. The market could tighten further if China does start buying, as Asian LNG demand rises in the summer on the back of increased electricity demand.

The price gap between Asian spot LNG and UK gas prices – used as a benchmark for Atlantic basin LNG – also remained around $4/m Btu meaning diversion opportunities were still open. UK gas for July delivery was trading at around $9.5/m Btu on 1 June.

Indian invests

Market sources said India was interested in buying more spot cargoes, with the country also signing significant long-term deals to secure LNG supply to meet its growing energy needs.

Indian energy company Petronet signed a preliminary deal with Russia’s Gazprom to buy up to 2.5 million tonnes a year (t/y) for the next 25 years. This adds to Petronet’s 7.5 million t/y deal with Qatar’s Rasgas to deliver to its 10 million t/y Dahej import terminal in western India.

Petronet also has a 1.5 million t/y contract with Australia’s Gorgon project to start in 2014. This is expected to be delivered into the southern Kochi terminal which is expected to start up before the end of 2014.

Meanwhile, a consortium led by India’s state-run Oil and Natural Gas Corporation has bid $3.4 billion for a 15% stake in Novatek’s Russian Yamal LNG project, according to media reports. Novatek expects to make the final investment decision on the Arctic LNG plant in 2012, with 5 million t/y LNG production to start in 2016. Kwok W Wan, London.

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