Low prices cloud LNG decision horizon

Projects being postponed: price is the big one when it comes to LNG proponents deciding to go ahead with a project.

Picking up where I left off last time, price is the big one when it comes to LNG proponents deciding to go ahead with a project.

Typically they had to have about two-thirds of their planned production sold under a long term contract – usually 25 years – at a price linked to that of oil before they would give the green light.

A contracted price did not mean a fixed price. Rather it was based on the moving average of oil prices over a specified period which had the effect of smoothing out the peaks and valleys.

The terms of the contract also committed the buyers to taking a certain quantity of LNG per year with penalties if they failed to do so – rather like the “take or pay” provisions in the contracts between Pacific Northern Gas and Methanex, the Kitimat methanol plant that shut down a decade ago.

The uncontracted portion of the LNG production would be sold on the open market, called the spot market.

So, obviously, when the spot price went up, the producer coined it, and conversely when it went south, took a hit.

But over the long haul the producer got the amount of revenue required to cover all costs and make a solid profit so long as supply and demand remained in balance, better yet a bit on the tight side.

Life was good. Then the wheels fell off as oil prices plummeted dragging spot LNG down with it and the supply-demand ratio got out of balance.

A perfect example of how much the landscape has changed is offered by RasGas (Qatar) and Petronet (India).

In 1999 the pair signed a 25-year contract with prices linked to the five-year average price of oil.

It called for Petronet to take 7.5 million tonnes of LNG a year and included a penalty if it did not.

Last year Petronet, which was only taking 68 per cent of its contractual obligation, did some number crunching and figured out it would actually be cheaper to pay the $1 billion penalty and buy what it needed on the spot market.

Long story short, last November after months of negotiation Qatar forgave the penalty, slashed the contract price in half to about $6.50 per million British Thermal Units (mbtus) and agreed to work on a three-month average rather than 60 months.

The only concession Petronet made was to agree to increase its off take by 1 million tonnes a year to make up for the amounts it failed to take last year.

There is still a take or pay provision attached to the deal.

This breathtaking rewrite of a contract has had the predictable effect: other Qatar customers on long term contracts are making noises about renegotiating their contracts.

And I’m quite certain they will get, to varying degrees, what they wish for.

It cannot be overemphasized that Qatar is not cutting its financial throat by agreeing to such dramatic concessions.

Its break-even point for LNG is a mere $2 per mbtu and there is no other producer in the world that can match that.

There are other examples how it is a buyers’ market but I am running out of space so I’ll cut to the chase: what does all this mean for proposed LNG projects in our backyard?

Shell gave us the answer  just last month with its announcement it was postponing any final investment decision on its LNG Canada project until the end of the year.

Frankly, I suspect we will have to wait a while longer than that for a decision.

FOOT NOTE: I am grateful to fellow columnist Andre Carrel for pointing out I got my terminology wrong when writing last time about a way to prevent graders filling in driveways.

I called the device a wing whereas the correct term is grader gate. What was really interesting was he had seen the system in operation at municipalities he had worked for in the past.

Perhaps city councillors should give him a call.

Former Kitimat Northern Sentinel editor Malcolm Baxter now calls Terrace home.