LNG exporters facing a buyers' market, experts say

As competition intensifies between traditional exporters of liquefied natural gas (LNG) and upcoming ones, the wider natural gas market has turned in buyers’ favour, according to experts at the Baker & McKenzie Oil & Gas Institute in Houston.

With additional volumes of US and Australian natural gas heading for export markets, traditional exporters such as Qatar and Russia are facing increasing competition ushering in more competitive prices, albeit with regional disparities that are particularly pronounced in Asia.

Bob Henderson, associate general counsel for new business development and integrated gas at Royal Dutch Shell, said LNG export market was heading for a challenging time. “Both US and Australia are set to add 60mn tonnes of natural gas per annum; by any stretch of the imagination such volumes imply that it remains a LNG buyers' market.”

Volumes are set to rise according to Baker & McKenzie’s research as somewhere in the region of 60 new LNG projects were currently under construction. The US is imminently tipped to export gas via its Sabine Pass LNG terminal to the UK, European markets as well as Asia.

Current Asian contract prices were in the region of $12 to $14/MMBtu, but the most recent spot market prices have plummeted to as low as $6.65/MMBtu, the lowest level in almost five years, according to Platts.

In line with market conjecture, many delegates at the Houston event noted that a deal inked by Russia and China, for the latter to import Russian gas was very much dictated on Beijing’s pricing terms. The financial details of the agreement were not made public.

Another major beneficiary is Japan, a market sought by most LNG exporters, following its nuclear energy switch-off in wake of the Fukushima nuclear tragedy. Anne Hung, a Tokyo-based partner at Baker & McKenzie, told Sharecast the current situation was a complete reversal from the panic buying seen in Japan when the tragedy unfolded in 2011.

“The event sent Japanese utilities into the LNG market in panic buying mode, evoking emergency clauses to ensure the lights were kept on, often at a premium. But that panic buying reached such a point that some Japanese players overcommitted on procurement," Hung said.

Most long-term contracts around the time of the Fukushima tragedy were linked to the JCC Index, or Japan Customs-cleared Crude. Often nick-named the 'Japanese Crude cocktail', it served to make gas prices in Japan, and by extension in South Korea and Taiwan, dearer.

“Now as these long-term contracts reach a point where pricing would be revisited, the utilities are in a position to demand that price negotiations are not heavily predicated on one index – the JCC. We can therefore safely say that Japan and the Far East is finally approaching a buyers’ market where utilities ask LNG sellers to bid for supply contracts,” Hung said.

However, the Baker & McKenzie partner urged caution. “It is an extraordinary turnaround, but the Henry Hub [a major US gas distribution base in Louisiana] hasn’t docked near Tokyo. Asian importers will still pay a premium relative to North America, but they can look forward to better terms and more transparency when it comes to forward contracts."

Europe too would benefit, said Stephen Trauber, Citigroup’s global head of energy. “Qatari and US gas exports won’t supplant Russian exports to Europe any time soon. But increased competition would lead to better European pricing over the medium-term as sellers move in to seal supply contracts and buyers seek security of supply.”