LNG market becoming highly competitive
ISLAMABAD: A couple of weeks ago, we discussed in this space, the issue of spot vs long-term liquefied natural gas (LNG) contracts. In the following, we will highlight the emerging international LNG market.
Global LNG trade grew 6.4% in 2018 value at $150 billion. The market is getting competitive. There are already 20 countries supplying LNG which included Qatar, Australia, Malaysia, Russia, the US, Nigeria, Indonesia, Algeria, Egypt, and others.
A lot of capital expenditure is coming. Saudi Arabia is a new entrant while Oman and the UAE are already in the market, apart from Qatar. LNG prices have shown some volatility in recent years – these were at $15-20 per million British thermal units (MMBtu) in 2014, came down to $5 in 2017, rose to $10 in 2018 and are now trading around $5, both in Asia as well as Europe. The normal ratio between LNG and crude oil prices has traditionally been 80% and predictions are being made that the ratio may go down to 50% due to an LNG supply glut.
It appears that term contracts are risky although spot purchases have non-price risks. According to the IGU Report, out of global LNG trade of 316 million tons per annum (MTPA) in 2018, only 99 MTPA was contracted as non-term (32% of the total).
LNG suppliers prefer to have long-term oil-indexed contracts of 20-25 years, seeking price stability and visibility to ensure required investments. However, LNG spots are better indicators of supply and demand and this trend has been growing constantly.
Gas-linked contracts are originating from the US where LNG contracts are linked with the Henry Hub Index (HHI). Normal terms are 1.15 times of Henry Hub price plus liquefaction and transportation costs.
India’s 60% of supplies are coming under oil-linked contracts and 40% is based on gas-linked contracts, the latter coming mainly from the US. As China has superseded Japan as the largest LNG importer, Australia has superseded Qatar as the largest LNG exporter. It is being predicted that in a few years the US would become the largest LNG exporter due to being the lowest cost producer because of its cheapest shale resources.
Australia has been offering more flexible contracts while Qatar has stuck to the earlier day’s restrictive practices such as destination restrictions. Qatar Gas companies are reportedly under investigation by European regulators for their restrictive practices contrary to the cardinal principles of open competition.
Pakistan has three-term contracts with Rasgas of Qatar, Gunvor of Switzerland and Eni of Italy. The contract with Rasgas was a negotiated contract which sparked a lot of controversies. The government of the time claimed that its Qatar contract terms and prices were compatible with Qatar contracts with India and Bangladesh, which was demonstrably correct.
Later, two other LNG contracts were signed with Eni and Gunvor as a result of open bidding at quite reduced prices of 12.29% and 11.6427% of Brent crude (of the average of last three months) respectively.
These low prices caused further controversy. LNG was also procured in spot markets with a slope varying between 9.2% and 16%. At current crude oil prices of $70 per barrel, Pakistan-Qatar term contract prices at the 13.37% slope would come out to be $9.35, Eni at $8.82 (12.3%) and Gunvor at $8 (11.6427%). However, spot prices rise in winter, but these are not expected to rise by 100%.
Most countries renegotiated LNG term contracts in 2015 and it appears that another round of renegotiations is around the corner. The Pakistan Tehreek-e-Insaf (PTI) government has requested, if not demanded, price revision from Qatar in the wake of much lower market prices offered and contracted for with Eni and Gunvor.
According to the contract terms with Qatar, price openers can be done after 10 years. Pakistan wants it after five years, if not an outright revision shortly. However, increased supplies of 200 mmcfd have been agreed to recently by Qatar at 20% lesser prices along with some better credit terms
Japan has until recently been the largest importer of LNG, which has now been replaced by China. Japan has no domestic gas production and relies totally on LNG imports. Reportedly, Japan has been offering liberal prices to LNG exporters in order to encourage LNG flows as it is totally dependent on imports, unlike other countries.
Its LNG comes mainly from Australia, Malaysia, and Qatar and now some from the US also. Asian LNG prices have always been the highest consequently. Japan’s term contract prices had been at 14% of Brent in 2018. Spot prices were 10% lower on average. Spot prices vary seasonally, being high in winters and low in summers, generally speaking.
India is the fourth largest importer of LNG in the world while Pakistan’s ranking is ninth. India procures LNG from Australia, Qatar, the US and Russian company Gazprom which may not be necessarily bringing LNG from Russia.
Sixty per cent of India’s LNG supplies is linked with oil prices and 40% linked with gas prices. A new contract with Qatar’s Rasgas was signed around the same time as Pakistan did with Qatar.
India had older contracts with Qatar and ExxonMobil at higher prices which it renegotiated. Recently, a contract has been signed for LNG supply at $7 per MMBtu and if adjusted for Brent crude prices at the time of contract (June 2018), the slope comes out to be 9.7%.
More interesting is India (GAIL) contract with Cheniere of the US linked with the Henry Hub Index of gas prices. It is 1.15 of HHI plus liquefaction and transport cost. Earlier, the liquefaction cost was $3 per MMBtu, which has now come down to $1.5-2. It is not known if the liquefaction costs have been adjusted down accordingly.
Current LNG transportation cost is $1.08 per MMBtu. Based on this formula, the LNG price (DES) under this contract comes out to be $7.45 per MMBtu and $6.45 with adjustment – slopes of 10.64% and 9.21% respectively. However, slopes are irrelevant as it is a gas-linked contract.
We have provided the slope just for comparison. Cheniere’s prices appear to be comparable or competitive with Gazprom. However, gas-linked contracts appear to be more stable as HHI is much less volatile than Brent crude prices, which are subject to many variables including international peace and politics.
Concluding, LNG is entering a highly competitive market regime. It is difficult to come up with a fixed strategy as one has to deal with it on a case-to-case basis. Although competitive bidding is desirable, there are possibilities of invisible cartels.
"So-called oil mafia may be replaced by the gas mafia. Spot biddings do not indicate wider participation. Contracting procedures and terms and conditions, if brought closer to international practices, may lead to better prices."
South Asia is emerging as a significant LNG importing region opening possibilities of establishing a regional market. It is time to resist restrictive practices of LNG suppliers which may reduce effective costs and risks on the part of the buyer.