LNG suppliers must price flexibly due to demand uncertainty
Suppliers of liquefied natural gas (LNG) must prepare to be more flexible with their pricing because of uncertainty over gas demand from Europe and Japan
Philippe Sauquet, Total's president of gas and power, told the European Autumn Gas Conference that although global gas demand is expected to rise by 2% per year between now and 2030, Europe's outlook was poor. He added that uncertainty over Japan's nuclear strategy also clouded prospects.
"We are very concerned by what we see happening in Europe today but on a global basis we are optimistic with the 2% (demand) growth forecast," Sauquet said.
Sauquet said LNG suppliers will feel the force of increased gas market liberalisation and heightening pressure from Asian governments to price long-term supply contracts on a hub basis rather than being indexed to oil prices.
This means LNG suppliers and buyers "will need to find new commercial terms and more flexible ones", he said.
Asia's gas demand is expected to soar and drive a fundamental shift in global gas trading. The International Energy Agency forecasts gas demand in the Asia Pacific region to reach more than 800 billion cubic metres (cm) a year by 2017, up from around 300bn cm/y in 2000.
He added that uncertainties over LNG demand both in Europe and Japan will force suppliers to forge new relationships with new customers and be more accommodating with their commercial terms.
Japan's LNG demand soared in 2011 after the Fukushima Dai'ichi nuclear meltdown saw the country shut in its entire nuclear power generation fleetdisaster caused the country to shut down its entire nuclear capacity. Japanese LNG demand rose to 87m tonnes last year, up from 65 million tonnes in 2009. Japan had to replace nuclear power, which made up 30% of its energy mix before the accidentdisaster, with coal and gas.
Japan's prime minister ese Premier, Shinzo Abe, wants to restart the country's nuclear reactors to ease the financial burden of importing so much LNG. Last year Japan registered its first trade deficit in more than three decades because of its soaring energy- import bill.
However there is much political debate in the country about whether nuclear power should ever have a place in Japan's energy mix again. Japan's former Pprime mMinister, Junichiro Koizumi, has expressed vehement opposition to ramping up the country's nuclear capacity, citing over safety concerns.
An emerging source of LNG supply for Europe and Asia is the US. Wood Mackenzie consultancy said in a new report, US LNG into Europe - not for everyone, that flows of US LNG into Europe will be volatile and they will be dictated by global demand levels, especially in Asia.
European utility companies will also become increasingly reluctant to source gas on oil-indexed contracts, much like Asian buyers are now, Wood Mackenzie said.
"'Legacy pipe gas suppliers on northwest Europe, notably Norway and the Netherlands, are providing more gas on a spot basis; and new suppliers from Azerbaijan are prepared to provide gas on a spot priced basis," the consultancy said. "With the downstream business rapidly shifting to spot indexation across Europe, utilities are demanding pricing mechanisms that reflect local market conditions at any given time."'
Norwegian player Statoil's willingness to partially link its gas supply contracts to spot prices has helped it to muscle in on some of Gazprom's share of the European market. Last year Norway's pipeline exports to Europe increased by 14%, to 106bn cm, according to Cedigaz. Russia's exports to Europe fell by around 3% last year to just over 200bn cm.
"Unlike Asian buyers, European utilities are less prepared to pay a premium for gas supply security on the basis of diversity," Wood Mackenzie said. "Instead with weak demand growth, multiple pipe and LNG supply sources and swing production from Russia, many utilities perceive diversity and supply sufficiency."'
Total's Sauquet said there is still room for projects such as Yamal LNG to supply Europe with gas because of uncertainty over how much US LNG the country's Department of Energy will allow to be exported.
Total has a 20% stake in the Yamal project in Russia's Yamal Peninsula. The 5.5m tonnes per year, three- train project is expected to come online in 2016.
Sauquet added that alternative supplies from Australian LNG projects, which are expected to come on line from 2015, will be expensive. East Africa is also well placed to supply Europe but these resources will take time to develop. Emerging LNG hubs in Mozambique and the eastern Mediterranean lack infrastructure and financing.
Andy Brogan, Global Oil and Gas Transactions leader at Ernst and Young, said the global LNG market will change dramatically over the next decade because buyers will have a greater choice of supplies.
'It (the LNG market) will be much bigger and will be characterised by a very high cost base. There's going to be a very serious amount of volatility and that's going to lead to pricing pressures," Brogan said. "'Volatility is something you'll either be a victim of or you'll profit from. The industry is going to need to plan for it and have a change of mindset."