LNG margins remain very tight

HOW quickly things can change when it comes to the LNG file.

Just two months ago, I wrote about efforts by Japan and India to lower the prices they pay for liquefied natural gas by forming a buyers’ group  to pressure suppliers and end what they call “the Asian premium.”

Essentially they wanted to end long-term, oil-indexed contracts and take advantage of then lower spot prices or long-term contracts based on the comparatively very cheap Henry Hub futures.

Today that looks like a forlorn hope. The spot price for LNG for delivery next month has hit $18.30 per million British Thermal Units (mbtu), higher than the price of those nasty oil-indexed contracts.

Three weeks ago, Reuters reported that as a result “buyers in Asia are increasingly leaning on long-term supplies to avoid paying high spot LNG prices.”

And it is forecast those spot prices will top $20 per mtbu in short order. So much for the Indo-Japanese plan.

Of course there was another strand to the buyers’ argument, that with all the new production planned to come on line in the near future, LNG prices would fall so the last thing they wanted was to be locked into expensive long-term contracts. A logical enough argument if – and it is a big if – all that new production comes online as proposed and, more importantly, the demand for LNG remains where it is today.

On the supply side, we still haven’t yet seen so much as a bucket of LNG exported from the United States, none of the B.C. projects, with the possible exception of the tiny BC LNG Co-op, will be in operation before 2017 – and that is being optimistic – plus African projects are politely described as “underperforming.”

That said, there is little question that supply will have jumped significantly by 2020.

So what about demand? China National Offshore Oil Corp. (CNOOC) alone expects to add five LNG import terminals by 2015, doubling its current imports. And there are plans to build even more terminals to meet rising domestic demand plus the government’s policy of switching away from coal for power generation.

Gas demand has surged in Mexico, Brazil and Argentina and while Mexico will likely be supplied in large part by pipeline, the other two will be looking for LNG.

Overall, analysts forecast global LNG demand will climb at a rate of around seven per cent a year until 2020. As a result, Berstein Research says “we expect international gas markets to remain ‘tight’ through to 2020.”

In other words, no relief for Japan and India for the rest of the decade. Which suggests they might be well advised to lock into long-term contracts at the oil-indexed price for at least a good chunk of their requirements and hope they can top it up with less expensive Henry Hub based contracts – it should be noted that at this point projected US LNG production is a drop in the Japanese LNG bucket.

If the Japanese recognize the above reality, it should improve the chances of the Kitimat projects getting the contracts they need to get the green light.

As always, we shall see. In the meantime, we wait for the provincial government to unveil its plans for an LNG export tax.

That was supposed to happen this month but has now been put back to February, suggesting stiff resistance from project proponents.

I hope the province is aware of how tight margins are. In Australia, a proposed major onshore LNG plant was recently ditched because of ever increasing costs.

Instead of piping the offshore gas under water to the plant, the plan now is to use a floating LNG platform (FLNG) with neither the natural gas nor the liquefied version ever setting foot on Western Australia soil.

While the FLNG method is cheaper to build, it is a bit more expensive to operate.

But the reasoning behind the shift is that the margin over the lifetime of the project will be one per cent better than being onshore. Yup, just one measly per cent. Doesn’t leave a lot of room for a cure-all Prosperity Fund, does it?

Retired Kitimat Northern Sentinel editor Malcolm Baxter now lives in Terrace and can be reached at msdbax@citywest.ca.


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