LNG market to turn in seller's favor in two years

LNG market to turn in seller's favor in two years

Singapore (Platts)--13May2005


Buyers of liquefied natural gas have up to two years to negotiate contracts on
their terms before the tables turn in favor of suppliers, Fereidun Fesharaki,
president of FACTS, an energy consulting firm, said Thursday. "There is a
window of perhaps 12-24 months for buyers to negotiate contracts at relatively
low prices, somewhere between legacy levels and those of the Guangdong era,
but the window will close soon," Fesharaki told delegates attending the "LNG
Supplies for Asian Markets 2005" conference in Singapore. Legacy LNG contracts
refer to those signed in the 1980s by traditional LNG buyers Japan, South
Korea and Taiwan. In legacy contracts the indexation to oil prices is around
80%, which pushes up the cost of LNG when oil prices rise. "Guangdong era" LNG
contracts, meanwhile, refer to those signed by China at a much lower oil
indexation of 30% and an oil price cap of $25/bbl.

China entered its first-ever LNG import contract with Australia's North West
Shelf project in 2002, when the LNG market was tilted in favor of buyers, for
supplies to its first import terminal in the southern Guangdong province.
China's second LNG import contract with Indonesia's Tangguh project was also
secured at similar favorable terms. But robust demand growth from the United
States, traditional Asian buyers and new Asian buyers such as China and India
is forecast to quickly outstrip supply and bring an end to the "Guangdong
era", Fesharaki said. "We simply cannot find enough gas to feed the demand in
a timely manner," he added. As sellers regain the upper hand, they are likely
to refuse buyers' request of an oil price cap and will also insist on more
regular price reviews, Fesharaki said. The linkage to oil price in new
long-term LNG contracts will be "at least 50%", he said.

Fesharaki said he expected term LNG prices in Asia to rise to the $6-$8/MMBtu
range before the end of the decade. Japan paid an average $5.63/MMBtu for its
LNG imports in March 2005. Meanwhile, he forecast US Henry Hub spot gas prices
to rise to the $8-$10/MMBtu range by the end of the decade and Asian spot
prices to rise above this level. Platts assessed the Henry Hub spot price at
$6.63/MMBtu on Thursday. Despite complaints and resistance, especially from
the power sector, consumers such as Japan, South Korea, Taiwan and the US will
have "no choice" but to pay these high prices for gas, Fesharaki said.
However, China and India, which are "still not addicted to gas will find coal
the best buy", he noted.

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