Rising Asian demand may overhaul gas market

ZAWYA DOW JONES

DUBAI

ASIA’S natural gas market is heading for an overhaul that threatens to upset long-held pricing systems and potentially lower prices in the region, amid rising demand and a wider range of supply options.

For decades, gas was mostly bought and sold in Asia through contracts of 20-25 years with fixed prices, but increasing competition among suppliers and rising demand have led to more gas being traded in shortterm contracts at flexible prices.

The volume of gas sold in Asia in 2011 under short or mediumterm contracts rose 110 percent to 37.3 million tonnes, out of 61.2 million tonnes sold worldwide under such deals, the International Group of Liquefied Natural Gas Importers said in its last report.

Key natural gas players such as top liquefied natural gas exporter Qatargas, BG Group, France’s GDF Suez and Japanese trading major Mitsui are offering more short-term contracts in a bid to retain market share.

Greater demand from major developing nations such as China and India and smaller ones that are building LNG import terminals, apart from traditional buyers like Japan, will be met by Australia and Russia, new entrants such as Canada and the US, and several East African nations.

Russian major Gazprom is also looking to ship gas to Asia to boost profits as it faces falling margins for its expensive gas in Europe, where demand is weak and coal is cheaper.

Buyers are seeking more flexibility in LNG offtake to manage demand fluctuations and market uncertainties, a Mitsui spokesman told Dow Jones Newswires on Monday.

The rise in spot and shortterm LNG sales “will give more options to both sellers and buyers and will create greater liquidity in the market,” he added.

Rising spot liquidity is perhaps the single biggest threat to oil-indexed LNG sales as buyers no longer pay a premium for the security of supply, Macquarie analysts said in a recent note.

LNG prices in Asia are indexed to crude-oil prices and averaged $16-$17 per million metric British thermal units in Japan in the last two quarters, compared with North America’s average spot prices of $2- $3/mmbtu. Analysts estimate that US gas can be sold to Asia for around $10/mmbtu after factoring in transport costs.

Already, the gap between long-term and spot prices is narrowing.

Earlier this year, Korea Gas (Kogas), the world’s largest LNG importer, agreed to buy gas from Cheniere Energy’s proposed Sabine Pass project with prices based on US Henry Hub gas prices plus a fixed component.

More such deals will further undermine oil-linked pricing.

However, suppliers like Qatar have warned that short-term contracts may discourage investment in gas projects and damage long-term energy security.

“We do see change in the market driven by the emergence of some US exports—but this will be part of a long, slow evolution rather than a ‘revolution’,” Andrew Walker, BG’s Vice President of Global LNG, said on Monday.

But even a slight change in prices will matter to importers like Japan, which spent 5.4 trillion yen on LNG imports in the fiscal ended March 31—up 52 percent—after shutting its nuclear plants following an earthquake and tsunami last year. The country imports all its LNG needs.

With an expanding market, the number of intermediaries selling gas from portfolios versus projects is also rising, and market players like brokers, shipping agents, traders and pricing agencies are converging on Asia.

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