Sellers at the 8th Asia LNG summit in Beijing Wednesday said there is a growing shortfall of LNG globally, as buyers wait on the sidelines, preferring to sign LNG term contracts linked to other indexation points rather than traditional crude oil-linked pricing.
"There's a supply gap that needs filling of about 150 million mt/year by 2025; that's the amount of new projects that need to be sanctioned in order to meet market demand," Steve Hill, BG Group president of Global Energy Marketing and Shipping, said.
"There's a lot of potential supply and there's a lot of potential demand, but deals aren't happening, and that seems to be because there's a massive amount of confusion over indexation in the market today," Hill added.
Although numerous deals linked to the US gas benchmark Henry Hub have already been signed by those due to offtake from projects in the US, LNG sellers looking to develop projects elsewhere in the world remain resistant to using various gas hubs as an indexation point to price LNG, opting instead for the traditional oil link.
Hill said the standoff would likely lead to delays for those projects in the planning stages, keeping the market tight for years to come, as developers cannot sanction projects without locking in term deals.
"Lots of supply should result in a reduction of prices, but this will only happen if those projects are launched," he said. "And this only happens when people execute contracts."
"If buyers want lower prices, they should aim to launch as many LNG supply projects as possible."
RISK INVOLVED
Medan Abdullah, managing director of Asia Pacific for Gazprom Marketing and Trading Singapore, expressed his support for traditional oil-linked contracts.
"While there may be times when [a Henry Hub-linked price] looks attractive compared with oil-linked prices, its important to remember there's no scope for price review in a cost-plus system, where the fixed cost is incurred up front," Abdullah said.
Sellers said buyers were also taking on increased risk in adopting new price mechanisms.
"In the past, all the people bought on same index, and that allowed everyone to stay competitive with each other," Hill said. "If different buyers in the same market pick different indexes and those indexes move in different directions, there's a risk that people will have uncompetitive supply compared to their competitors." Hill said.
"While it's a fascinating debate, as an industry, we're in risk of forgetting what's actually important; not price indexation, that's just mathematics. It's the price level," he added.
DIVERSIFICATION PREFERRED
Domenico Dispenza, president of GIIGNL -- the international group of LNG importers -- highlighted the benefits of diversifying pricing points.
"When we speak on indexation points, what we are really looking at is diversifying the price level...I would recommend a kind of mix to spread the risk," he said on the sidelines of the conference. "A little bit of Henry Hub, a little bit of Brent, JCC, or even NBP."
"What would be the best for the consumers would be a price given by demand for LNG; then we start to see the real fundamentals, but for this we need LNG to become a commodity," he said.
However, buyers were optimistic that demand- and supply-derived prices could be possible in the near term, either through the creation of an Asian LNG or gas trading hub, or as a consequence of the likely uptick in short-term and spot sales that could emerge in the coming years due to the lack of term deals agreed recently.
"Over the last few years we have seen the growth of the short-term and spot supply market, to the extent that Asian buyers are now coming to rely on this for some of their base demand, which creates a new trading pattern, building out transparency and paper markets," Abdullah said.
