Gas buyers in Asia are facing the same problems of high prices and a monopolistic market that their counterparts in Europe faced a decade or so ago, but there is no equivalent regulatory body that can force suppliers to change their practices, delegates at the Gastech 2014 conference in Goyang, South Korea, heard this week.
Oil indexation in pricing clauses and bans on redelivery of cargoes in Asia mean that buyers are paying a price for liquefied natural gas that can only coincidentally reflect gas supply and demand, and they may not exchange cargoes between themselves as a means of mutually balancing their respective positions.
The chairman of state-owned importer Korea Gas Corp, Seok-hyo Jang, said one challenge was to make LNG supply economic and competitive, while the South Korean energy minister Yoon Sang-Jick said that Northeast Asia was hindered by an inflexible pricing system. Gas had to be allowed to be traded more freely, and oil indexation and destination clauses were the two biggest obstacles.
"We need suppliers and consumer nations to work together to create more opportunities for future development," the minister said.
The European Union, through its executive division, the European Commission, banned redelivery clauses signed with gas suppliers on competition grounds, and it has moved progressively towards hub trading in order to create liquidity, allow new entrants into the market, erode the significance of oil indexation and so improve the process of price discovery.
There is no comparable body in Asia, as IHS' senior director for gas, Chris Holmes, pointed out. "The challenge is whether Asia can do what the EU did, to liberalize to form hubs," he said. He tentatively suggested that Singapore would be well placed to act as a hub, as so much of the world's LNG sailed past it on the way to North Asia from the Middle East.
But there were obstacles in the way of an exchange developing there, such as the sheer volume of energy that an LNG tanker carried, compared with a standard lot size on the US NYMEX. "We are unlikely to see a hub in the near or medium term," he said. "There is not the liquidity or the pipeline gas trade."
An executive with a major LNG supplier told Platts that hubs could develop, for example near Japan, Taiwan, South Korea and China, and a series of pipelines could help in that regard. Several Japanese speakers also referred to the need for more pipelines to interlink markets and create efficiencies.
But as other delegates told Platts, the importers would have to make concessions too. The kind of shift envisaged towards a free market, while bringing prices down, would entail the loss of their regional or national monopolies.
The executive also questioned the rationale behind buyers forming consortia in order to create some flexibility. That only served to create opacity downstream, he said, and as a seller he did not welcome that.
LONG-TERM CONTRACTS ARE A PROBLEM FOR ASIA AND EUROPE
As in Europe, so in Asia the long-term contract is itself a problem, according to lawyer Paul Griffin, the global head of oil and gas at Allen & Overy. Nobody enters an agreement expecting to end it prematurely, he said, but there comes a price at which that becomes necessary for one or the other party. That has happened in Europe, through the arbitration tribunals, while the solution in Asia has been to source gas that is not based on oil prices -- from the US.
However, NYMEX, with a churn factor of 100, is at least liquid enough for buyers of Henry Hub-based gas to hedge their positions, going long in the US so that they may sell there if the price rises.
And the expansion of the Panama Canal to handle vessels such as Japanese Kawasaki's 165,000 Moss tanker, with its minimal boil-off rate (0.08%/day) and swift 19.6 knots, will allow US gas to reach Japan and South Korea faster by crossing the Pacific. The canal is due to open up a year or so before the first LNG from the US could leave Cheniere Energy's Sabine Pass export project.
On the negative side, US gas is lean, while Japan has been buying gas with a higher heating value, so investment will be needed to enrich the methane with condensates.
Qatar has responded nimbly to the US and European gas oversupply caused by the US shale gas revolution and economic recession respectively.
In 2010, it had expected to sell a quarter of its gas to the US and 35% to Europe, the remaining 40% going to Asia. Last year, Asia took as much as 70% of the total, as Qatar has converted volumes intended for spot sales into long-term contracts, according to Qatargas' COO Alaa Abujbara.
Such behavior means that LNG liquidity cannot be expected to rise even though the amount of LNG is set to rise sharply, as Australian and US LNG comes to the market, said BG's vice president for global LNG, Andrew Walker. "As an industry we do not build merchant capacity or swing capacity," he said. "Our industry is becoming even more capital intensive."
Most LNG projects in Australia, including BG's Queensland LNG, due to start this year, have exceeded their estimated budgets, while East Africa and Canada are taking longer than expected to develop as exporters.
Delegates heard how floating LNG, while still an untested technology, allowed a much faster path from concept to delivery, and avoiding ballooning costs and endless slippages and problems with major onshore industrial development in a virgin site.
Several delegates told Platts they thought that Qatar risked alienating its customers by its insistence on oil indexation, rather as Gazprom has in Europe, where it is the largest single supplier.
Major importers of gas in continental Europe have written off billions of euros on lost investments in power plants and long-term gas capacity contracts as their gas price has remained higher than the coal price, as oil indexation still accounts for more than half the total gas sold. As a consequence, European coal burn has risen sharply, with negative consequences for health.
Qatar occupies a broadly similar role in Asia, as the largest single supplier, and with a product that has a negligible cost.
Qatar's sales of condensate, produced with the natural gas, offset the investment in the LNG plant, consultants have said. Australian LNG, by contrast, is only marketable today in Asia, as the cost of production of coalbed methane and shipping it to Europe would be a waste of money, judging from industry estimates that put the production cost at equal to, or higher than, the UK NBP price for prompt delivery.
