Old guard calls foul on sweeter LNG deals luring new buyers

By Tsuyoshi Inajima, Stephen Stapczynski and Emi Urabe on 4/10/2017

TOKYO (Bloomberg) -- Buyers in the world’s largest liquefied natural gas markets are concerned upstarts are winning better deals than traditional customers who helped underwrite the industry.

New importers in the Middle East and South Asia could be getting cheaper LNG than established users in North Asia, according to Hiroki Sato, a senior executive vice president with Jera Co., one of the world’s biggest buyers of the super-chilled gas. Sellers may be sweetening deals to lock up fresh customers as new projects, made possible partly by long-term commitments from buyers in countries including Japan and South Korea, flood the market, he said.

To raise the tens of billions of dollars needed to build an LNG project, developers have traditionally needed to find both large natural gas resources as well buyers willing to commit to purchase contracts that can last more than 20 years. Jera’s wariness over how new importers are being courted highlights the growing pressure on sellers trying to manage old relationships while winning new customers amid the oversupply of capacity that’s tilted the seaborne gas market in favor of buyers.

“Japan and some other Asian countries are traditional foundation buyers for many LNG projects, but substantial demand is now coming from emerging markets” Sato said in an email Friday. “I am afraid their price may be cheaper than ours. Who supported the greenfield projects? We traditional buyers have a right to the cheapest price.”

Many Japanese customers and other big buyers signed supply deals between 2012 and 2014 when prices were at their peak, according to Kerry Anne Shanks, an analyst at Wood Mackenzie Ltd. in Singapore. Those contracts require them to buy gas at a higher percentage of the price of crude -- known as oil indexation -- than newer agreements, she said.

Last year, Pakistan State Oil Co. agreed to import LNG from Qatar at 13.4% of the price of oil, while Japan’s Chubu Electric Power Co., Kansai Electric Power Co. and Tokyo Electric Power Co. Holdings Inc. all reached deals in 2012 with the country at a price 14.9% of oil, according to Bloomberg New Energy Finance. Chubu has another contract from 2007 at 17%.

“Clearly these foundation buyers are annoyed that low-credit buyers in emerging markets are getting better deals than them,” said Shanks. “But it is a function of when the deals were signed.”

Spot LNG in Northeast Asia has fallen from nearly $20 per million British thermal units in early 2014 to $5.65 as of last week, according to World Gas Intelligence.

As demand in a traditional buyer like Japan is seen falling as more renewable power comes online and nuclear plants restart, gas producers are focusing on emerging markets and new importers to soak up a coming flood of supply. Beyond offering cheap prices to new LNG entrants, sellers are also seeking ways to create even more customers by encouraging projects that spur the fuel’s use.

While Japan is the world’s biggest importer of the fuel, its future growth is unclear, according to Alexander Medvedev, deputy head of Russia’s Gazprom PJSC. The world’s largest gas exporter is setting its sights instead on China and developing countries including India, Pakistan, Bangladesh and Vietnam, he said in an interview last week.

Royal Dutch Shell Plc sees investing in gas pipelines as one way to unlock demand in countries with rudimentary infrastructure, Maarten Wetselaar, director for integrated gas and new energies, told reporters last week at the Gastech conference outside Tokyo. Floating storage and regasification units -- the term for import facilities that are cheaper and faster to build than traditional terminals -- are key to capturing new demand, along with using LNG as fuel for ships, Engie Global LNG Chief Executive Officer Philip Olivier said at the event.

Even smaller customers are in focus. Power plants that don’t burn enough gas to justify a land-based import terminal or an ocean-going FSRU can utilize “ tiny FSRU” barges, according to Kees van Seventer, a division president at Koninklijke Vopak NV. Their 25,000 cu m of capacity can be a better fit than the 130,000 to 170,000 cu m for an FSRU, which cost about $40 million annually to lease.

Due in part to new technology, 45 nations may be capable of importing LNG by 2020, up from 33 today, according to ConocoPhillips Chief Executive Officer Ryan Lance.

“Our world is changing and demand has changed location,” Engie’s Olivier said. “It is only a matter of seizing the opportunities. No need to wait for the demand -- track it, create it.”

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