Asia's U.S. LNG fever going cold as buyers seek supply swaps

By Fitri Wulandari, Rajesh Kumar Singh and Debjit Chakraborty on 3/9/2017

JAKARTA, Indonesia, and NEW DELHI, India (Bloomberg) -- More Asian LNG buyers are trying to avoid taking the U.S. supplies they signed up for just a few years ago in order to cut shipping costs.

GAIL India Ltd. and Indonesia’s PT Pertamina are both seeking to trade LNG cargoes they are contracted to buy from the U.S. in exchange for supplies shipped from projects closer to home.

They’re following buyers such as Tokyo Gas Co. in trying to avoid deliveries of LNG from the U.S. after the global oil price crash reduced the discount of American gas relative to other suppliers. That’s made minimizing shipping distances more vital to buyers looking to reduce freight costs.

“The underlying volatility in Henry Hub prices has dented the competitiveness of U.S. LNG, especially in Asia, providing the trigger for the swap deal,” said Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics in London. 

Pertamina, Indonesia’s state energy company, is in talks with an international energy firm to swap some of its LNG cargoes from the U.S. to cut shipping costs, Didik Sasongko Widi, a V.P. for LNG at the Jakarta-based company said in a phone interview Tuesday. In exchange, Pertamina would get supplies from closer ports, helping it mitigate price risks. Widi declined to identify the potential counter-party.

GAIL, India’s state gas utility, is seeking agreements with Denmark’s Dong Energy and PetroChina Co. to swap about 1 million tons a year of U.S. LNG for delivered supplies to cut shipping costs and time, according to people with knowledge of the plans. The company has a separate deal with Swiss trader Gunvor Group, in which GAIL will receive LNG this year in exchange for U.S. cargoes next year.

Swap volumes

GAIL Chairman B.C. Tripathi said last week that it was in talks with various players to swap U.S. volumes, without giving details. Gunvor and PetroChina declined to comment, while a Dong spokesman said the company doesn’t comment on “rumors.” A GAIL spokeswoman didn’t respond to an email seeking comment.

Most U.S. LNG exports are tied to domestic natural gas prices, while global LNG sales have traditionally been linked to oil. That made U.S. suppliers attractive earlier this decade when crude prices hovered above $100/bbl and U.S. gas slumped amid a production boom from shale patches from Texas to Pennsylvania. That dynamic has shifted since the oil market crash. Brent crude was at $53.53/bbl as of 9:19 a.m. in Hong Kong on Thursday, down by more than half since mid-2014.

Pertamina signed deals in late 2013 and 2014 with Cheniere Energy Inc. to buy 1.52 million tons a year of LNG from the company’s Corpus Christi, Texas, terminal starting as early as 2019, Widi said. It’s now in talks to sell 750,000 tons of that to the international firm and in exchange receive an equal amount from locations closer to Indonesia.

Pertamina’s contract with Cheniere calls for it to buy gas at a 15% premium to the benchmark Henry Hub price plus a fixed charge of $3.50/MMbtu, according to Bloomberg New Energy Finance.

Little room

At the end of 2013, when the deal was negotiated, that would have been a little more than $8/MMbtu. Spot LNG in Northeast Asia was more than $18 at the time, according to World Gas Intelligence. That left plenty of room to ship from the U.S. and still pay a discount. Now spot LNG in Asia has fallen to just $5.95, while Pertamina would pay $6.86 for its U.S. LNG even before shipping it halfway across the world.

Pertamina and GAIL aren’t the only companies trying to figure out what to do in the face of that shifting dynamic, as the U.S. is poised to become the world’s third-largest exporter of LNG in the coming years. Tokyo Gas agreed last year to trade some of its U.S. LNG to England’s Centrica Plc for the same amount of fuel from Asia.

“GAIL can save costs and also avoid potential losses in case U.S. LNG is expensive to bring to India compared to other options like buying spot LNG in the Pacific basin,” said Ashish Sethia, head of Asia-Pacific gas and power analysis at Bloomberg New Energy Finance.

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