Buyers market for LNG turns tables on producers amid supply glut

By STEPHEN STAPCZYNSKI, TSUYOSHI INAJIMA and EMI URABE
Bloomberg

Encouraged by the plunge in commodity prices, the world’s biggest buyers of LNG are demanding more say in negotiations with their suppliers.

Two of the largest utilities in Japan, the world’s top purchaser of the fuel, said they will no longer sign contracts that restrict reselling cargoes by limiting the destination of shipments they buy. Customers elsewhere in Asia are pushing to break LNG’s price relationship with oil and to start regional trading and storage hubs.

The changes being sought could reshape the industry, making LNG easier to trade and allowing for expansion of a spot market. Permitting customers to resell shipments would result in buyers, sellers and traders competing for profits in a marketplace akin to that of crude oil.

“The increasing number of suppliers of gas in the market, of course, makes the hands of the importers stronger,” Fatih Birol, executive director of the International Energy Agency, said in an interview. “This will also increase the negotiating power when it comes to importing discussions.”

Flexible Contracts

Consumers of the fuel are also looking for more flexible contract terms even as producers, such as Exxon Mobil Corp., say that financing LNG projects will continue to depend on long-term deals. Such suppliers have historically locked in buyers to 20-year agreements, which also prohibit the resale of cargoes.

LNG producers are forecast to add 50 million metric tons of capacity next year, the largest annual increase in history and equivalent to a fifth of current global demand, according to Sanford C. Bernstein & Co. Prices for shipments to northeast Asia have tumbled by about two-thirds since February 2014 to $6.70 per million British thermal units, according to New York-based Energy Intelligence Group.

Amid the anticipated surge in exports from Australia to North America, prices could fall to $4 by 2017, according to Fereidun Fesharaki, chairman of energy researcher FGE. Long-term LNG contracts for Asia customers are typically linked to the price of Brent, which has fallen by about half over the past year.

Last year, prices jumped to a record $19.70 as China added import terminals, boosting global demand.

The plunge in prices is disrupting global supply-chain patterns, according to Qatar Energy and Industry Minister Mohammed Al Sada. LNG buyers see no urgency to commit to long-term supply contracts, he said at a conference in Tokyo on Sept. 16. Qatar is the world’s largest exporter of LNG.

Petronet LNG Ltd., India’s largest importer, is taking only 70% of the volumes it agreed to in 25-year contracts with Qatar, according to Finance Director R.K. Garg. The New Delhi-based company is paying about $8 per million British thermal units for spot LNG—about 36% less than its contracted price with Qatar’s RasGas Co.—Garg said.

RasGas declined to comment.

“Supply options are increasing for the consumers,” Petronet LNG’s CEO Prabhat Singh said in New Delhi by phone. “We are moving into a buyers’ market and people will go the way that offers better options, which could range from attractive prices to easier contractual terms like relaxing the destination clauses and shorter-tenure contracts.”

Qatar will work to protect existing contractual relationships even if that means making concessions, said Ashish Sethia, head of Asia-Pacific gas and power analysis at Bloomberg New Energy Finance, or BNEF.

Bargaining Power

Jera Co., a joint venture created by Tokyo Electric Power Co. and Chubu Electric Power Co. to enhance bargaining power, won’t sign LNG contracts with destination clauses, according to Hiroki Sato, V.P. of the JV’s fuel-procurement department. The company wants to help establish an LNG price index in Asia and plans to cut its ratio of long-term LNG contracts to about half the total, increasing spot and shorter term purchases to make up the difference.

So-called destination clauses prevent buyers from reselling cargoes or taking delivery outside their home country, restricting arbitrage and trading opportunities amid limited liquidity in spot markets.

Buyers are not only renegotiating existing deals, they’re also hesitating to commit to new long-term contracts, cutting off a crucial source of funding for the development of planned projects from the U.S. to Australia. LNG facilities—which can cost more than $50 billion—cool natural gas to about -256 degrees Fahrenheit (-160 Celsius), changing the fuel to liquid form and compressing its volume so it can be shipped.

While a shift toward more spot transactions and shorter-term deals won’t end long-term accords, suppliers say new buyer models jeopardize financing structures that ensure future production will continue to be developed.

“There is no doubt that different contract arrangements are being experimented with as buyers look to manage price risk,” Exxon Mobil Gas & Power Marketing Co. President Robert S. Franklin said in Tokyo on Sept. 16. “But financing for LNG projects will always hinge on long-term commitments from credit-worthy buyers.”

Price Relationship

If buyers and producers don’t agree on reforms soon it will be difficult for LNG’s market share to expand in the longer term, particularly in Asia, according to the IEA’s Birol.

LNG for export to Asia should be based on regional prices rather than linked to Brent, according to Yeo Yek Seng, deputy chief executive of Singapore’s Energy Market Authority. The city-state, which has one import terminal, is seeking to become a regional trading and storage hub, as it has done for oil. Asia imports about 75% of global shipments.

“Now is the perfect time to address the structural problems of the market,” Jae Do Moon, vice minister of Trade, Industry and Energy for South Korea—the world’s second-biggest buyer—said at a conference in Tokyo Sept. 16. “Once an environment where LNG can be freely traded is created, the natural gas market will take on a new life.”

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