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Total CEO makes case for oil-linked LNG price

Christophe de Margerie noted the pressure that will be on LNG producers to insist on oil-linked gas contracts to safeguard long-term returns

The cost of exploration and liquefied natural gas (LNG) projects are set to rise – further stoking the conflict between producers and consumers over how to price gas, Total chief executive Christophe de Margerie said this week.

In his keynote speech to the 2012 World Gas Conference, de Margerie said the complexity of projects and other inflationary factors meant upstream costs jumped 75% between 2005 to 2011, and that this would put pressure on LNG producers to insist on oil-linked gas contracts to safeguard long-term returns.

“The issue is even more critical in areas of intense E&P (exploration and production) activities and scarce manpower, like Australia and Canada.  In this context of high project costs, the visibility of the long-term LNG price is critical,” de Margerie said.

LNG producers would like oil-linked contracts, but Asian consumers would like to move to hub-based pricing, a conflict which de Margerie acknowledged.

“Commercially, the long-term price of LNG is a major challenge where two conflicting positions have to be reconciled. Producers need to see long-term cash flow in order to finance huge projects and they have to be in a position to arbitrate LNG projects and oil projects.  Like the banks, they are comfortable with using oil-indexed gas for long term contracts,” he said. 

“At the same time, the consumers on the other side are definitely more attracted to hub gas prices which are developed on local and liquid markets. “ 

On Thursday, Japan Gas Association chairman Mitsunori Torihara told conference delegates that oil-linked LNG contracts were no longer reasonable because gas competes with coal, rather than crude, in power generation. 

While oil prices have soared, US hub gas prices have dipped and European spot gas prices have remained relatively flat. “We’ve never seen such a gap between North America and Asia [natural gas prices],” de Margerie said.

The French major is also expected to finalise the raising of its stake to 30% in the Ichthys LNG project in the coming “days and weeks”.  The 8.4 million tonnes a year (t/y) Australian project is expected to cost $34 billion and is being developed with Japan’s Inpex, which is also the operator.

Total was also “unaware” of any changes in the ownership structure of Russia’s Shtokman gas and LNG project, commenting on media speculation that Shell may join the project.

“I’ve never discussed this with Shell, not with Gazprom, not with anybody,” de Margerie said in a press briefing after his speech.  He also saw no reason to use floating LNG (FLNG) technology at Shtokman.

“If you know the size of the reserves and production, it doesn’t fit with FLNG.  Three million t/y is far too small for production at Shtokman, so FLNG is not an option,” he said.  Shell is developing its Prelude FLNG project in Australia which is expected to have 3.6m t/y production capacity when operational in 2017. 

Shtokman, which has been subject to years of delays and has not reached a final investment decision yet, is expected to have 12m t/y of LNG export capacity. The other Shtokman partners are Gazprom and Statoil.

Total also does not expect the US to export much LNG due to political pressure to keep domestic gas cheap in order to help US chemical and manufacturing companies.

“The exports of LNG from the US will be limited for one simple reason: the US wants to keep the price under control, at as low as possible.  I don’t think there will be many, many projects,” de Margerie said.  He added that Canada was more likely to become a LNG exporter and that Total could also be interested in US LNG projects.

“Are we interested? Yes we are always interested to buy gas at low prices and sell it at higher prices. That’s called LNG trading,” he said.

The US could become the world’s top LNG exporter at over 100m t/y capacity if all proposed projects are green lighted, but most are yet to be approved by the government.

Total also expected the Elgin-Franklin gas platform, offshore UK, to restart operations before the end of the year. The North Sea platform was shut in earlier this year after a blowout and gas leak. The blowout has been killed.

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