Offshore customers push for lower LNG rates

Toshimitsu Motegi is not a happy camper these days. Neither is Veerappa Moily...

Toshimitsu Motegi is not a happy camper these days.

Neither is Veerappa Moily.

The Japanese Minister of Economy, Trade and Industry and the Indian energy minister respectively, they and their governments are ticked off by the price they are having to pay for their LNG (liquefied natural gas) imports.

And they forcefully expressed their displeasure at an LNG producer-consumer conference held in Tokyo early last month.

What’s driving them really crazy is they are having to cough up around $16 per million British Thermal Units (mmbtu) while natural gas is freely available in the United States at dirt cheap prices – around $3.70/mmbtu at Henry Hub at the time of writing.

Henry Hub is a major distribution point in Louisiana and its name is applied to natural gas futures contracts. By the way, Canadian natural gas is even cheaper.

The problem of course is that Asian LNG prices are traditionally linked to the price of oil via an index with the wonderful name Japanese Crude Cocktail.

The buyers argue that with North American prices where they are and a lot more LNG production expected to come on line around the world in the coming years, it is time to de-link from oil and establish a global commodity market for LNG.

They’ve sung this song before, of course.

But what was new this time is Japan and India have agreed to form a buyers’ group – which other Asian countries are encouraged to join – with the goal of bringing pressure to bear on suppliers and ending what they call “the Asian premium”.

And they point to the fact that some Asian buyers have already signed long term contracts with US producers-to-be based on Henry Hub’s cheaper prices.

One such US outfit is Freeport LNG which announced last month it had signed 20-year deals with Toshiba of Japan and SK of South Korea at a price of Henry Hub plus $7/mmbtu.

In other words, based on today’s Hub price and rounding up, only $11/mmbtu.

However, producers both existing and proposed are unimpressed.

Qatar is the largest producer of LNG in the world and supplies both Asian and European customers.

At that same conference its oil minister, Mohammad Bin Saleh al-Sada, essentially said what is happening to prices in a “remote market” (read North America) was irrelevant to the Asian market.

In other words Qatar is not likely to buckle to pressure any time soon.

Appearing just as unyielding is Chevron, the lead partner in the proposed Kitimat LNG project.

In a conference call to announce the company’s second quarter results, CEO George Kirkland left no doubt: “We do not plan to have Henry Hub linkage.”

This was consistent with the company’s oft-repeated position that it needed oil-indexed prices to justify spending billions of dollars to build  the Kitimat LNG plant and pipeline to supply it.

But he also threw out an interesting idea.

If Asian customers bought equity in the project, in the long term they might do as well, if not better, than Henry Hub-based contracts.

Basically his argument is that if a customer buys into the project, what they lose on the swings (oil-indexed prices) they gain on the roundabouts (a share of the revenues from the project).

And they get a guaranteed price whereas the cost of contracts tied to lower-price Henry Hub rates will likely increase over time, thus eroding any supposed benefit.

It will be fascinating to see how this plays out.

Malcolm Baxter was the editor of The Northern Sentinel in Kitimat and has now retired and is living in Terrace, B.C.