Asia LNG Prices May Rise 'More Than 75%'

Sydney - Liquefied natural gas prices in Asia may rise more than 75% over the next five years, increasing costs for companies such as Korea Gas Corp and China National Offshore Oil Corp, on higher US demand.

Asian buyers may pay as much as $8 per million British thermal units by 2010, from the regional average of about $4.50 now, said Fereidun Fesharaki, president of Honolulu-based consultant FACTS Inc.

US gas futures have averaged $6.64 this year, more than covering the cost of chilling the fuel into liquid and shipping it from halfway around the world.

ExxonMobil Corp, Chevron Corp and BP Plc are among producers that plan to divert some cargoes from plants in the Middle East and Asia Pacific, which buys about 67% of the world's annual supply worth about $40bn.

"If they can fetch more money from US and European buyers, why insist on the Asian market?" Lee Jae Chul, a manager in Korea Gas's LNG transportation team, said by telephone from Seongnam on May 31.

Korea Gas, the world's biggest LNG buyer among companies, paid suppliers $7bn, excluding shipping costs, for LNG imports in 2004, spokesman Lee Sang Wook said on June 3.

Royal Dutch/Shell Group, Europe's second-biggest oil company, agreed to export more than $10bn of LNG over two decades from the proposed Gorgon project in Australia to a terminal being built in Mexico.

Shell will export as much as 2.5mn metric tonnes a year of gas to the Energia Costa Azul terminal starting in 2010, the Chevron Corp-operated Gorgon venture said April 11 in an e-mailed statement. Shell owns 25% of the venture.

A futures contract is an obligation to buy or sell a commodity at a set price by a specific date. The terminal near Ensenada, in Baja California, will be the first to import LNG to North America's West Coast.

This year's average price of natural gas for delivery at the Henry Hub in Louisiana is more than double the $2.90 average in the same period three years ago on the New York Mercantile Exchange. In October, the price rose as high as $8.75.

Shipping LNG to Europe from Asia instead of to local markets such as Korea may add 30? a million British thermal units to the cost of the fuel, and 70? to the US, Korea Gas's Lee said.

"Shipping costs are not a big factor," he said. "It's the price of LNG that matters."

Growth in the US and Europe may help worldwide demand to double to 250mn metric tonnes by 2010, according to RasGas, a Qatari venture with ExxonMobil.

LNG is natural gas cooled to liquid, reducing it to one-six-hundredth of its original volume for transportation by tanker to destinations not connected by pipeline. On arrival, it is converted back to gas for delivery by pipeline to consumers such as power stations.

Gains in contract prices for LNG would end a brief period of record-low prices won by China, India and Korea since 2002, after decades of high prices when producers sold fuel under multiyear so-called "legacy" contracts, said Fesharaki, whose FACTS consulting business advises 50 clients, including most of the top 10 oil companies, on oil and gas markets.

"The third phase is now emerging with prices well above the second phase," Fesharaki said. "We are likely to see prices above the legacy contracts soon and with tougher selling attitudes."

A glut from new projects prompted a venture led by BP in Indonesia to agree in September 2002 on a record-low price of $2.40 per million British thermal units to supply a terminal to built by China National Offshore Oil in Fujian, excluding shipping to China and assuming a crude oil price of $20 a barrel in the price-setting formula.

The price was the same as an earlier agreement by Australia's North West Shelf venture to supply China National's terminal in Guangdong, Rachmat Sudibyo, the head of Indonesia's Oil & Gas Regulatory Body, said on October 24, 2002.

China's first contract is likely to remain the low point for LNG prices, Susan Farmer, a London-based partner at law firm Watson, Farley & Williams who advises on international energy projects, said on May 13 at the LNG Supplies for Asian Markets 2005 conference in Singapore.

"Guangdong might have been a price marker for a short period, but it would be difficult to achieve now," Farmer said.

Petronet LNG Ltd, which became India's first LNG importer in February last year, will pay about $3.25 per million British thermal units for 5mn tonnes a year of LNG from Qatar's RasGas over five years, Finance Director P Dasgupta said on January 13 last year.

   Ventures including Royal Dutch/Shell Group and Total SA agreed to supply Korea Gas with 100mn tonnes starting in 2008 at about $3 to $3.40 per million British thermal units, assuming $20 oil, Lee Keum Woo, a manager in Korea Gas's LNG trading team, said on February 16.

"The low prices agreed in recent contracts with China, Korea and India may prove to be a thing of the past," Andy Flower, an independent LNG consultant and former BP Plc executive, said May 25. "Asian buyers have to reconsider their position if they are to secure the LNG they need."

Low Asian prices run the risk of dragging more cargoes out of Asia to higher-priced markets in Europe and the US, Flower said. "Could Asian buyers find themselves short of LNG because their competitors in Europe and the US scoop the available supplies?" he said.

In January, Iran agreed on a price for LNG to be exported to India that was 63% higher than the price offered 18 months earlier, Fesharaki said. "The supposed buyers window is closing quickly," Randolph Howard, senior vice president of Unocal Corp's global gas unit, said May 12 at the LNG Supplies for Asian Markets 2005 conference. "By 2009, base demand well exceeds currently contracted supply."

Japan is the world's largest LNG importer, accounting for about half of the 123mn tonnes traded in 2003. Demand in South Korea, the second-biggest buyer, may rise at least 42% to more than 30mn tonnes a year by 2017, Kim Myeong Nam, a director of Korea Gas's international projects office, said in March.

India, which started importing LNG last year, may increase consumption to 10mn tonnes by 2007, Suresh Mathur, managing director of India's Petronet, said on February 9. China, which will receive its first shipments next year, may consume 30mn tonnes a year by 2010, Fu Chengyu, chairman and chief executive officer of CNOOC Ltd said in Hong Kong on May 25.

US imports may rise to 40mn tonnes by 2010, according to John Banner, president of the LNG marketing arm at Australia's North West Shelf venture. The US imported 13.7mn tonnes in 2004, according to the Department of Energy's website.

Rising demand has spurred construction of new LNG plants. BHP Billiton, Australia's biggest oil and gas producer, estimates that 25 new production units, or trains, will start construction in the next five years, Bret Mattes, vice president at BHP Billiton's petroleum unit, said at the South East Asia Australia Offshore Conference in Darwin, Australia.

BHP Billiton, which is also the world's biggest miner, estimates that LNG demand will rise from about 150mn tonnes at present, to about 280mn in 2010 and possibly as high as 360mn in 2015, Mattes said.

Qatar plans to raise LNG sales fourfold to 77mn tonnes a year by 2010, Ali al-Hammadi, chief operating officer of Qatar Liquefied Gas Co (Qatargas), told a conference in London on May 24. About 75% will go to Europe and the US

"The gas markets in Asia will remain tight in 2005, 2006 and 2007, although a lot more capacity is coming on stream bound for the Atlantic Basin," FACTS's Fesharaki said. "New supplies will come after 2007, but the demand pressure will overwhelm them. Under any scenario, prices will rise and the seller's market will become more consolidated."

Source: Gulf Times, June 13, 2005
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