Indexing LNG prices to oil continues to be vital to the LNG industry and planned exports from North America that would be more linked to spot gas prices would not have a major impact on the global market, the head of an Australian oil and gas firm said Wednesday at the CERAWeek conference in Houston.
David Knox, CEO and managing director of Santos, an equity holder in the Gladstone LNG project in eastern Autralia that would export LNG from coalseam gas, said virtually all the 80 million mt/yr (equivalent to 10.2 Bcf/d of gas) of planned new Australian LNG production has been sold under long-term contracts indexed to oil prices.
"Our project would produce about 8 million mt/yr at a cost of $16 billion," he said, explaining that would be a high cost of production that could only be borne by long-term supply contracts indexed to oil prices.
"The only way are able to do it is long-term, 20-year contracts based on a 15% discount to oil."
He said upcoming Australian projects might be able to retain 5-10% of their LNG output for the spot market, but needed long-term contracts for financing.
Asian LNG contracts typically drawn up at a discount to oil prices in terms of energy units. A barrel of oil typically contains 5.8 MMBtus, so, at oil prices of $100/barrel, a gas price equivalent to oil would be $17.24/MMBtu at 100% indexation. With a 15% discount, the gas price would be about $14.65/MMBtu.
Knox said on the sidelines of the conference that he could not disclose the actual terms of Gladstone LNG's supply contracts, but an 85% indexation to oil prices is roughly accurate, with a cap on the oil price.
Gladstone LNG has signed two long-term supply contracts with Malaysia's Petronas and South Korea's Korea Gas, for 3.5 million mt/yr each. The project is slated to come online in 2015.
With global LNG production expected to reach 425 million mt/yr by 2025, North American exports based on spot prices would not represent more than 10% of the market, so global pricing dyanmics should not be changed significantly, he said.
