Spot, short-term LNG sales grow to 28% of market

(Bloomberg; Aug. 15) - The market for liquefied natural gas is about to attract more players and more trading as new supply from the U.S. and Australia strengthens buyers’ bargaining power. Historically, LNG has been sold on long-term deals that guaranteed supply for buyers and helped producers finance liquefaction plants. Now, a natural gas glut is causing countries that import LNG to support renegotiating existing deals that can run 20 years or more as suppliers lower their prices in a move to shrink stockpiles.

India already is encouraging importers to rework long-term accords to better align costs with spot market prices. Japan, the world’s largest LNG importer, may soon join them. “There will be 40 million to 50 million tons [annual capacity] of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers,” said Hiroki Sato, a senior executive vice president with Jera Co., a Japanese fuel buyer that plans to increase its spot and short-term LNG deals over long-term contracts.

About 28 percent of LNG traded in 2015 was on a spot or short-term basis, up from 18.9 percent in 2010, said the International Group of Liquefied Natural Gas Importers. As the oversupply intensifies next year to the point that Asian buyers can’t absorb the surplus, new trading may emerge from Asia to Europe, said Kazuhiko Inomata, a deputy director with Itochu Corp., Japan’s third-largest trading house. Jera, a joint venture of Chubu Electric Power and Tokyo Electric Power, plans to resell surplus LNG to Europe. Sumitomo, the fourth-biggest Japanese trader, is considering an LNG office in Europe.

Read more: Oil and gas news briefs Aug. 18 2016

Wood Mac expects overrun at Chevron’s Wheatstone LNG project

(Interfax Global Energy; Aug. 11) - Chevron has been under pressure from cost, labor and construction issues as it starts up its Gorgon LNG project in Western Australia. Now it is rumored to be facing overruns at its second Western Australia-based LNG project, Wheatstone. This week, Wood Mackenzie said it expects Wheatstone to cost more than originally forecast, but it will also produce 1.2 percent more liquefied natural gas.

"We have remodeled Wheatstone LNG economics, increasing our estimate of capex by 15 percent to US$36 billion. We have increased our expected output to 9 million metric tons per year, in line with the performance seen at other Australian LNG projects. We expect first cargo in the second half of 2017," Wood Mackenzie said in its analysis. The project developer has pegged maximum output capacity at 8.9 million tons per year.

The West Australian newspaper this week reported that the Wheatstone partners could meet within weeks to sign off on a revised budget up to US$10 billion higher than planned. For now, Chevron is sticking to its US$30.5 billion cost estimate, despite announcing last January that the project would start up six months later than planned because of construction issues. The partners made their final investment decision in 2011, when market demand was strong and LNG prices were much higher.

Chevron has pre-sold more than 85 percent of its equity LNG from Wheatstone’s first train to Japanese utilities and trading houses. But the poor outlook for prices could make it more challenging to pre-sell LNG from Wheatstone’s second train. Chevron is the operator with a 64.14 percent share. Its partners are Kuwait Foreign Petroleum Exploration Co. (13.4 percent), Woodside Petroleum (13 percent), PE Wheatstone (a consortium of three Japanese firms, 8 percent) and Kyushu Electric (1.46 percent).

Read more: Oil and gas news briefs Aug. 15, 2016

Japanese LNG buyer plans to cut long-term supply contracts 42%

(Reuters; Aug. 10) - Japan's Jera Co., the world's biggest importer of liquefied natural gas, is planning to cut the amount of gas it purchases under long-term contracts by 42 percent by 2030 from current levels, the company's president told Reuters. The company now buys 34.5 million metric tons of LNG per year under contracts for 10 years or longer. By 2030, that will drop to about 20 million tons, President Yuji Kakimi said. Jera will take this step to prepare for the liberalization of the Japanese electric market that has clouded the outlook for LNG purchases by the country's utilities.

Kakimi also said future LNG consumption may be limited by nuclear plant restarts and renewable generation such as solar power. The cutbacks in long-term contracts put question marks over planned large-scale, multibillion-dollar LNG projects that rely on long-term deals to win financing. LNG suppliers to Asia are also suffering through a 72 percent slump in prices since February 2014. Jera, a joint venture between Tokyo Electric Power and Chubu Electric Power, takes in 40 million tons of LNG per year.

The company's long-term contracts start expiring in 2018, and Kakimi said Jera has no plan to sign new, large-volume pacts for the foreseeable future. To offset the decline as long-term contracts expire, he said Jera will sign long-term agreements for about 5 million tons — equal to a single LNG production unit. The government forecasts Japan’s LNG imports will fall to 62 million tons in 2030 from a record 88.5 million tons in 2014 because of a shift to nuclear power as plants restart and more use of renewable energy.

Japan's retail electricity reform started in April, ending regional monopolies, throwing future power sales into doubt and forcing utilities to reduce long-term contracts to cover minimum fuel requirements, Kakimi said. "The power generators cannot have fuel for 20 years without having [matching] long-term power sales contracts," he said.

Read more: Oil and gas news briefs Aug. 11, 2016

Japan’s biggest LNG buyer wants more contract flexibility

(Reuters; Aug. 8) - Japan's Jera, the world's biggest importer of liquefied natural gas, is raising the pressure on exporters to allow it to resell gas it has to take under long-term supply contracts. Most LNG contracts forbid importers from reselling their cargoes under so-called destination clauses. But, soaring supply, especially from Australia and the U.S., and slumping demand has importers unable to absorb their contracted volumes. As a result, they are seeking more flexibility, including reselling their surplus.

Jera, a joint venture between Tokyo Electric Power and Chubu Electric Power, took over the companies' fuel contracts last month, with an annual offtake totaling 40 million metric tons. Jera's Chief Fuel Transactions Officer Hiroki Sato said he does not want to have any further discussions involving destination clauses with producers. "I'm aiming to have destination clauses out of the discussions.” Sato is keen to see Japan's big LNG importers join together to put pressure on exporters and extract more beneficial terms.

To strengthen Japan's negotiating position, he would welcome if Tokyo Gas and Kansai Electric merged LNG buying like Jera to further consolidate Japan’s procurement. As opposed to the contracts from most new Australian projects, U.S. LNG is priced off domestic spot markets — without destination restrictions. Less than 10 percent of Jera’s contracted supplies are completely destination free. The majority come with conditions such as profit-sharing of re-sold gas or an obligation to seek sellers’ approval. To get more LNG without destination clauses, Jera plans to take more stakes in U.S. projects.

Read more: Oil and gas news briefs Aug. 8, 2016

Tokyo Gas among Japanese utilities looking to trade U.S. LNG

(Bloomberg; July 31) - Tokyo Gas, Japan’s second-biggest buyer of liquefied natural gas, is in talks with European companies to swap cargoes it has contracted from the U.S. with those in Asia to reduce shipping times and costs. The utility is offering cargoes from the Cove Point, Md., project, which is expected to start up late next year and from which it is contracted to buy 1.4 million metric tons a year, CEO Kentaro Kimoto said. He declined to identify the European companies or the volume Tokyo Gas would swap.

“It takes a lot of days to bring LNG to our terminals in Japan from the U.S.,” Kimoto said. “We can send cargoes to Europe and in return get the fuel in swap deals with European players who have a position in Asia.” Shipping U.S. LNG to Japan takes about 20 days, while the travel time to Europe is roughly 10 days, he said. Japan is among countries forecast to have an LNG oversupply in coming years, transforming some of the world’s biggest buyers of the fuel into sellers. Tokyo Gas, Tokyo Electric, Chubu Electric and Osaka Gas are looking to resell or swap surplus cargoes of U.S. LNG.

Tokyo Gas, in particular, is seeking flexibility amid uncertainty over LNG supply projects including one under development led by Inpex Corp., Japan’s biggest oil and gas explorer. Inpex said in September that start-up of its 8.9-million-ton-a-year Ichthys project in Australia was delayed until the third-quarter of next year. Tokyo Gas has a deal to buy 1.05 million tons a year from Ichthys. “The timing of the start-up of Ichthys and Cove Point projects could make us oversupplied or undersupplied,” Kimoto said.

Read more: Oil and gas news briefs Aug. 4, 2016

Shell defers investment decision on Louisiana LNG plant

(MarketWatch; July 28) - Shell is deferring its final investment decision this year on a multibillion-dollar facility to export liquefied natural gas from Lake Charles, La., citing a global oversupply of the fuel and affordability of the project amid lower oil prices, the company's chief executive said July 28. It is Shell’s second delay for an LNG project. Earlier this month, the Anglo-Dutch oil and gas giant said it was delaying a final investment decision on its LNG export project in Kitimat, B.C.

"This is not the moment to commit to large-scale capital outlays, even though the fundamentals of these projects in their life cycle still look good," CEO Ben Van Beurden said. Chief Financial Officer Simon Henry said “gearing” at Shell, which in February completed a $50 billion acquisition of BG Group, could increase to its 30 percent limit if oil prices don't rise. Gearing, a measure of the extent to which a company's operations are funded by debt, rose sharply to 28.1 percent at the end of the second quarter vs. 12.7 percent in the second quarter of 2015, reflecting the BG acquisition, Shell said.

"It [gearing] may go up before it comes down again, simply because the oil price today is at a level that we would not generate positive cash flow unless we were doing the divestments," Henry said, referring to the company's plan to sell assets. Shell's net debt at June 30, 2016, was $75.1 billion, nearly triple the $25.96 billion of a year ago. Shell inherited the Lake Charles project in its acquisition of BG Group, which had been planning to add liquefaction and export capabilities to the 34-year-old LNG import plant.

Read more: Oil and gas news briefs Aug. 1, 2016

Japan forecasts decline in LNG imports as nuclear plants restart

(Platts; July 25) - Japan's LNG import price over July-December is expected to average $6.60 per million Btu, compared with $6 in January-May this year, and will likely rise to $7.40 for calendar year 2017 on the back of higher oil prices, the Institute of Energy Economics, Japan said July 25. "There is a possibility that the gap between the long-term LNG price (linked to oil) and spot price (based on market conditions) will widen as we expect LNG spot price to remain depressed and to trade around $5 with more supply to be added to the market," the IEEJ said.

IEEJ projects crude oil prices at $47 to $50 per barrel the rest of this year. For 2017, Brent, West Texas Intermediate and Dubai oil prices are expected to rise to $55, $54 and $52, respectively. Regardless of oil prices, Japan's LNG imports are expected to totsl 82.2 million metric tons for fiscal year 2016-17 (April-March), down 6.2 percent year on year, and fall further to 70.9 million tons in fiscal 2017-18, according to IEEJ.

The estimates are based on the assumption that seven nuclear reactors will restart by March 2017, with an additional 12 reactors to restart in the next fiscal year starting April 2017, bringing to total 19 nuclear reactors up and running by the end of March 2018.

Read more: Oil and gas news briefs July 28, 2016

LNG price crash leaves little revenue for Australian government

(Australian Broadcasting Corp.; July 21) - Australia's largest ever investment boom of $200 billion in LNG projects during the past decade has crashed spectacularly and left the federal government with little or no revenue to show for it. Australia's gas is now being exported to Asia at close to the cost of production, leaving investors with marginal returns and raising the prospect that some coal-seam gas projects may be mothballed.

"We are on the cusp of becoming the biggest … LNG exporter in the world," said energy analyst Greg Houston. But the collapse of LNG prices means there will be little or no financial benefit. "The crash is a slow-moving train wreck," Houston said. "The price has dropped by 75 percent. That's a huge financial hit to the people who have made this investment." Long-term contracts for the gas have been pegged to the price of oil, which has meant the recent steep fall in the oil price has also hit LNG exports.

"The drop in oil prices has really hit the economics of these projects hard, as it's happening right when they are starting up," said Wood Mackenzie analyst Saul Kavonic. At risk, Kavonic believes, are some of the coal-seam gas projects based at Gladstone, which could be forced to run below capacity or shut down. "There is no doubt that the current low oil prices are very inconvenient," said Origin Energy CEO Grant King. Origin is a partner in one of Australia’s newest LNG plants fed by coal-seam gas.

The LNG boom has also been of little benefit to taxpayers, said Monash University's Diane Kraal. "In terms of revenue from tax, it's very minimal," she said.

Read more: Oil and gas news briefs July 25, 2016