Costly LNG Development at Risk Over Fuel Price Spat

Dozens of multibillion-dollar natural gas shipping terminals proposed from Canada to Mozambique risk being held up by an industry debate over how to determine the fuel’s price.

Investment by companies including BG Group Plc, Chevron Corp. and Exxon Mobil Corp. in seaside terminals to liquefy gas for global transport depends on buyers signing long-term contracts at prices high enough to justify projects that can cost more than $50 billion. Some Asian buyers are holding off on 20-year purchase agreements as they assess how U.S. exports may impact prices, according to industry consultants ADI Analytics.

“Pricing is definitely the critical issue,” Uday Turaga, chief executive officer of ADI Analytics, said in an interview at the IHS CERAWeek conference in Houston yesterday. “There is the view among buyers that there is going to be a significant amount of supply coming on stream and they feel they can wait on contracting decisions.”

Energy companies are vying to build coastal gas export terminals in the U.S. to capture prices in Asia that are now five times higher than North America’s. Surging supplies of the fuel from shale formations overwhelmed domestic demand and deflated prices.

Gas Prices

Cheniere Energy Inc.’s Sabine Pass, the first U.S. liquefied natural gas, or LNG, export terminal under construction, has contracts with customers including Centrica Plc and Total SA. Freeport LNG Development LP, with the next U.S. project in line on the U.S. Gulf Coast, has long-term agreements with Asian buyers including Osaka Gas Co., Chubu Electric Power Co., and SK EKS.

Import prices for LNG in Japan averaged $16.06 per million British thermal units last year, compared with an average of $3.729 for gas futures on the New York Mercantile Index, according to data compiled by Bloomberg.

Gas supplies from U.S. projects would cost less than Canadian projects, between $10 and $12 per thousand cubic feet, compared with $11 to $13, Greg Pardy, an analyst at RBC Capital Markets in Toronto, wrote in a Feb. 25 report. Liquefaction costs will be lower in the U.S., where some projects can build on to existing LNG import facilities, he said.

The industry is disputing the potential for the spread between U.S. and Asian gas prices to narrow, which would lower the cost for consumers of the fuel, including power utilities in Japan, Korea and India. A resolution may not emerge until 2015 when the first U.S. LNG supplies are expected to come online, Turaga said.

Global LNG

Most of the global LNG market is priced through long-term contracts linked to oil prices rather than gas. There’s a limit to how much those contracts can change because while buyers are seeking prices linked to U.S. gas, they don’t want to be dependent solely on that country, BG Group CEO Chris Finlayson said at the conference.

“Looking at the global LNG trade through to 2025, we still see supply rather than demand as the constraining factor,” Finlayson said.

As both supply and demand rise and infrastructure is developed around import terminals in Asia, buyers will benefit from lower prices, said Rajeev Mathur, executive director of marketing at GAIL India Ltd.

“By 2025, hopefully more buyers, more sellers, more liquidity, more infrastructure would happen and will eventually lead to a convergence of prices,” Mathur said in an interview yesterday at the IHS CERAWeek conference.

U.S. Exports

The potential for Asian LNG prices to fall relative to the price for U.S. gas would require more than the “marginal” 50 metric tons a year of U.S. exports that are probable in the near term, said Stephane Caudron, head of LNG at Gunvor International BV in Geneva. It would require “a huge amount” of U.S. gas to be exported to the rest of the world, Caudron said in an interview yesterday.

It may be later this decade, when U.S. exports become significant, before buyers and sellers of LNG start to agree on how to set the price, Turaga said.

“The companies that buy large volumes of LNG are using their heft to frame the debate,” Turaga said.

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