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Cheniere chief says LNG prices need to rise 20% to secure new investments

Charif Souki, the chief executive of Cheniere Energy, said LNG prices need to rise another 20-25% to sanction new projects

Souki told delegates at Singapore International Energy Week that prices of $7-8/m British thermal units (Btu) in Europe and $8-9/m Btu in Asia would be enough to trigger new investment in US LNG expansions, as long as domestic prices, which are tied to LNG sales deals, remain stable. He added that current LNG prices are not sustainable.

Prices of spot LNG delivered to markets in northeast Asia averaged $6.70/m Btu for November, data from the latest Platts Japan/Korea marker showed, down 11.1% on October and 53% below prices seen for the same delivery month last year.

Peter Coleman, chief executive of Australian LNG developer Woodside Petroleum, which has partnered Cheniere in the US, told the conference he would be excited by slightly higher pricing signals, which would be needed to trigger investment decisions for greenfield schemes. But he added that the LNG industry in general has a lot to learn from the US business model.

Australia is on track to become the world’s biggest exporter of LNG, while the US, which will export its first cargo of LNG next year, could be the world’s third-largest producer of LNG by 2025.

The US expects to complete 65m tonnes a year of new export capacity within the next five years.

Cheniere will export its maiden cargo from the US in January, marking the first exports of cheap and abundant US shale gas in the form of LNG.

Once Cheniere's first LNG plant starts up, the company will bring a new production train online every six months until mid-2019, when it will have seven liquefaction trains in total at its Sabine Pass project in Louisiana and Corpus Christi terminal in Texas.

The seven trains will make up almost half of the 65m t/y of LNG export capacity being built in the US. The company is permitted to build another two trains, but has yet to take investment decisions.

Cheniere has sold most of its 31.5m t/y of LNG via long-term deals, with about 4m t/y remaining for sale in spot markets, Souki said.

The company plans to start offering a cargo a month from December, he said, hoping this will improve market liquidity. Souki added that he's also prepared to send an LNG shipment to an Asian hub next year to help accelerate the growth of regional trade.

Singapore’s Minister of Trade and Industry, S. Iswaran, told the conference that the introduction of a secondary gas trade market will enhance Singapore’s position as a hub for LNG and gas trading activities, paving the way for the potential establishment of an Asian gas futures market.

It’s crucial that Asia, the largest market for LNG in the world, starts to aggregate supply and start physical pricing based on gas-on-gas competition, said Souki, adding that the region needs more than one hub. To succeed Singapore’s LNG hub needs to coexist with Tokyo Bay and Shanghai.

Coleman added that in his view a truly fungible market, like the oil market, is needed for gas.

LNG business models based on oil-indexed pricing and long-term deals do not seem to suit customers anymore, said Souki, who expects future sales contracts to be more short term. “The markets in Asia were not given the opportunity to grow at the pace they could have because of the pricing mechanisms. But the growth prospects are very exciting and is something nobody can ignore”, he added.

Responding to questions about the rising costs of LNG development in Australia, Coleman told reporters they were “a bit of a misnomer”. The reality is that Australian LNG projects are built modularly in Asian shipyards, which have become uncompetitive, he said. They are not delivering on schedule and cost. It was a challenge the industry needed to address collectively, he said.

“The traditional wage arbitration we could rely has gone as Asians demand higher wages”, he added. While in Australia, back-office costs, which make up about 40% of total costs, have got out of control. “It’s a compliance issue and the way we go about our engineering, which used to be a very small percentage of the overall cost.”

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