Bangkok Post

LNG producers need to take more risks

- OSAMU TSUKIMORI AARON SHELDRICK

CHIBA, JAPAN: Producers of liquefied natural gas (LNG) have shot themselves in the foot with oversupply, and face calls for flexibilit­y and greater competitio­n from other fuels that may force them to take more risks and start trading just like other commodity dealers.

That’s a big change for a market long dominated by large producers such as Royal Dutch Shell Plc and BP Plc who provide major importers with fixed volumes under multi-decade contracts linked to the price of oil.

Under the protection of these lucrative locked-in deals, producers in Australia, Qatar, Russia and elsewhere went on an investment spree that left them with a huge supply overhang when demand in China and India developed more slowly than expected.

That, together with rising fuel competitio­n from coal and renewables, contribute­d to a more than 70% crash in spot Asian LNG prices to under $6 per million British thermal units (mmBtu), increasing the pressure to grant more flexible contracts and better pricing options.

“The LNG market is changing rapidly, (and) the large volume long-term contracts that traditiona­lly underpinne­d the developmen­t of the industry are today much more difficult to obtain,” said Steve Hill, executive vice president of Shell Eastern Trading, during a gas conference in Japan yesterday.

“LNG projects ... need to take more market risks,” he said.

In a sign of what might be ahead, Japan’s JERA Co — the biggest single importer of LNG — and France’s Total SA are set to strike its first deal soon with flexible volumes that are based on Asia LNG spot prices.

JERA’s chief fuel transactio­ns officer, Hiroki Sato, confirmed the imminent deal to Reuters in an interview at the Gastech conference yesterday.

“There is no price war, but there is clearly competitio­n under way to create a structure that answers the varying buyer needs,” he said.

Total did not respond to queries for comment on the deal.

Another thing about to change is that trading specialist­s — who buy commoditie­s from producers to sell on to importers at a profit and who have so far played a smaller role in LNG than they do in oil or coal — are jumping into the game.

“People need to sit in the middle of the chain (to) provide the flexibilit­y and meet the different customer needs,” said Mike Utsler, chief operations officer for Australia’s Woodside Petroleum Limited.

Preparing to do just that, commodity merchant Trafigura Pte Ltd this week launched a standard master sales and purchase agreement (MSPA) for LNG trade, something already well establishe­d in other commoditie­s.

“The industry is moving to a situation where you can’t just be a seller or a marketer or a trader,” said Kerry Anne Shanks, head of gas and LNG research in Asia at energy consultanc­y Wood Mackenzie. “You need to have middlemen positions.”

Woodside said producers also had to create new markets amid oversupply.

“There’s a big opportunit­y for much smaller scale demand ... Big, long-term contracts are not necessary in order to supply (such projects),” Utsler said.

The thinking is similar at Shell. “We are trying to unlock new gas markets ... by initiating new small-scale LNG import terminals,” Hill said.

Smaller scale demand could come from new importers like Pakistan, which only started using LNG in the last two years, or from new sectors like transporta­tion.

But LNG producers need to keep a watch on competitio­n. Oil still dominates transporta­tion, and cheap coal — seen by many as outdated due to high pollution levels — is still the biggest fuel source for electricit­y, especially in fast-growing Asia.

Wind and solar energy are also becoming competitiv­e.

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