LNG market to turn in seller's favor in two years
Singapore (Platts)--13May2005
Buyers of liquefied natural gas have up to two years to negotiate contracts on their terms before the tables turn in favor of suppliers, Fereidun Fesharaki, president of FACTS, an energy consulting firm, said Thursday. "There is a window of perhaps 12-24 months for buyers to negotiate contracts at relatively low prices, somewhere between legacy levels and those of the Guangdong era, but the window will close soon," Fesharaki told delegates attending the "LNG Supplies for Asian Markets 2005" conference in Singapore. Legacy LNG contracts refer to those signed in the 1980s by traditional LNG buyers Japan, South Korea and Taiwan. In legacy contracts the indexation to oil prices is around 80%, which pushes up the cost of LNG when oil prices rise. "Guangdong era" LNG contracts, meanwhile, refer to those signed by China at a much lower oil indexation of 30% and an oil price cap of $25/bbl. China entered its first-ever LNG import contract with Australia's North West Shelf project in 2002, when the LNG market was tilted in favor of buyers, for supplies to its first import terminal in the southern Guangdong province. China's second LNG import contract with Indonesia's Tangguh project was also secured at similar favorable terms. But robust demand growth from the United States, traditional Asian buyers and new Asian buyers such as China and India is forecast to quickly outstrip supply and bring an end to the "Guangdong era", Fesharaki said. "We simply cannot find enough gas to feed the demand in a timely manner," he added. As sellers regain the upper hand, they are likely to refuse buyers' request of an oil price cap and will also insist on more regular price reviews, Fesharaki said. The linkage to oil price in new long-term LNG contracts will be "at least 50%", he said. Fesharaki said he expected term LNG prices in Asia to rise to the $6-$8/MMBtu range before the end of the decade. Japan paid an average $5.63/MMBtu for its LNG imports in March 2005. Meanwhile, he forecast US Henry Hub spot gas prices to rise to the $8-$10/MMBtu range by the end of the decade and Asian spot prices to rise above this level. Platts assessed the Henry Hub spot price at $6.63/MMBtu on Thursday. Despite complaints and resistance, especially from the power sector, consumers such as Japan, South Korea, Taiwan and the US will have "no choice" but to pay these high prices for gas, Fesharaki said. However, China and India, which are "still not addicted to gas will find coal the best buy", he noted.
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