LNG buyers gain advantage in oversupplied market, analyst says

(Sydney Morning Herald; March 1) - Buyers are rapidly gaining the upper hand in Asia's oversupplied liquefied natural gas market, dragging down prices and forcing producers to rethink expectations for long-term sales contracts that have underpinned Australia's LNG boom. Increased supply and lower prices are putting pressure on traditional pricing models for LNG, with spot sales set to snare a bigger slice of the market and long-term contracts becoming shorter, said Jonathan Smith, oil and gas sector leader at KPMG.

"Right now we're seeing a power shift," said Smith, part of KPMG’s global financial consultancy. "We have all of this supply coming on at the same time, which creates choices." Smith's comments came as the world's most powerful LNG buyer warned that producers should expect to see new buying and pricing trends emerge as supplies increase — particularly from Australia and the United States — opening up more options for importers to source deliveries.

Yuji Kakimi, president of Japan's Jera Co., the new LNG purchasing giant formed between Tokyo Electric Power and Chubu Electric, said LNG suppliers face a dilemma as they are pressured by low returns due to the sustained slump in oil prices. Kakimi forecast that in 10 years a specific Asia LNG pricing market will emerge "that has measurable liquidity and whose transactions within that market environment … are transparent in their pricing.”

Read more: Oil and gas news briefs March 3, 2016

LNG-buyers alliance seeks to expand membership

(Bloomberg; Feb. 26) - Japan's Jera Co. said it's in talks with other LNG buyers to create an alliance accounting for over one-third of global trade. Jera, a joint venture between Tokyo Electric Power and Chubu Electric Power, is seeking to cooperate with Korea Gas and China National Offshore Oil Corp. on liquefied natural gas procurement and investment, said Hiroki Sato, vice president of Jera's fuel-buying department. “If the alliance allows flexibility between members to balance their LNG import volumes, that is very attractive for buyers,” said James Taverner, a Tokyo-based analyst at IHS Inc.

A deal between the companies may lead to the creation of a potentially dominant bargaining alliance as buyers band together to take advantage of new LNG supply from Australia and the U.S. that is tilting negotiating power in favor of consumers. "We can work hard to lower prices by using our large volumes," Sato said Feb. 25. "The bottom line is we should work together to reduce costs in Japan, as well as the rest of Asia."

The deal would benefit smaller companies outside the group as lower prices would be passed on to other buyers, Sato said. The alliance members would also be able to swap or trade cargoes among themselves to help balance supply between their operations. Meanwhile, the global oversupply is continuing to drive down prices. Asian spot LNG prices fell below $5 per million Btu for the first time last month, extending its tumble from a high of $19.70 in February 2014. Cargoes under long-term contracts, traditionally linked to oil, may fall to $4.10 per million Btu by June, Credit Suisse said Feb. 5.

Read more: Oil and gas news briefs Feb. 29, 2016

LNG suppliers get more competitive to protect market share

(Platts; Feb. 24) - The world's gas producers — for a relatively long time — had it fairly easy selling their gas. Long-term contracts, regional markets and a lack of rivals allowed the likes of Russia, Norway and Algeria to dominate European gas markets, and for the likes of Qatar the wider global LNG market. But with prices in the doldrums and the threat of new supplies of LNG from Australia and the U.S., traditional gas exporters are having to be more creative in their sales effort as they bid to keep hold of market share.

"Producers and marketers need to act now to increase their competitiveness in a market where the demand outlook is less optimistic than it was," analysts at Accenture said in a report this month. Russia, Norway and Qatar have been looking to find ways to tempt new customers with bargain deals and new sales techniques, or to keep hold of existing buyers by agreeing to better terms and more contract flexibility. With Australian and U.S. LNG ramping up, the older suppliers have been on a public relations offensive.

Russian flows to Western Europe have hit record highs so far in 2016 as Gazprom looks to retain, or increase, its share of that key market, while Norway has won a new buyer of its LNG in Lithuania. And Qatar, still the world's biggest LNG exporter, has offered particularly generous terms to key buyers India and Pakistan in the past few months. "The future for LNG, at least for the next 10 years, looks set to be a buyers' market which will keep prices lower than we have seen in the past," Accenture said.

Read more: Oil and gas news briefs Feb. 25, 2016

Russian energy expert says Arctic LNG needs $60 oil to break even

(Port News; Russia; Feb. 19) - Arctic liquefied natural gas projects will not be economically viable if oil prices are below $60 per barrel, Alexander Kudrin, head of the Directorate for Strategic Studies in Energy of the Analytical Center for the Government of the Russian Federation, said at the International Conference Arctic-2016, held Feb. 18-19 in Moscow.

Supplies of LNG from Russia to Europe will hit break even if LNG fetches $7 to $8.50 per million Btu, which corresponds on an energy-equivalent basis to oil at around $60 per barrel, he said. That’s double the current market price for oil. Global LNG prices are down, too. Prices in Asia are much lower than when the decision was made to invest in the Yamal LNG project in Russia’s Arctic. That plant, which is under construction, is scheduled to begin operations late next year, though it continues to have problems lining up the last of its financing.

Kudrin said low prices mean the Russian government is not likely to earn its expected rate of return from Arctic LNG projects. Private interests from Russia, China and France are developing the $27 billion Yamal project, though the Russian government is aiding the venture by funding airport and port construction, providing icebreakers for the LNG carriers, and helping with project financing.

Read more: Oil and gas news briefs Feb. 22, 2016

Japan’s LNG imports drop 14% in January

(Bloomberg; Feb. 18) – Japan, the world’s biggest buyer of liquefied natural gas, said its imports fell the most in almost seven years in January as nuclear reactors have restarted and warm weather cut demand. Shipments to Japan fell 14.1 percent in January, the biggest drop since May 2009, to about 7.2 million metric tons from a year earlier, according to the Ministry of Finance. Since August, Japan has restarted three of its 43 nuclear reactors that were shut following the 2011 Fukushima nuclear disaster.

Also helping to reduce demand for LNG, the country has had warmer-than-normal temperatures the past three months, according to the Japan Meteorological Agency. In addition, Japan’s electricity consumption has dropped to the lowest since 1998 amid a shrinking population and more energy efficiency. A decline in Japan’s LNG imports may add to a global glut as new export projects start in Australia in the U.S. Prices for the fuel delivered to Northeast Asia have slumped to the lowest in at least five years.

“LNG imports will certainly decline this year as reactors are brought back online,” said Junzo Tamamizu, managing partner of Clavis Energy Partners, a Tokyo-based consulting and advisory firm. The nation’s increased use of solar power will also continue to reduce LNG consumption for power generation, he said. The government forecasts Japan’s LNG demand to fall by about 30 percent by 2030 to 62 million tons from its peak in 2014, in large part due to the restart of more nuclear reactors.

Read more: Oil and gas news briefs Feb. 18, 2016

‘World isn’t going to wait on Canada’ for LNG, researcher says

(CBC News; Feb. 10) - The longer the delay in liquefied natural gas facilities being developed in British Columbia, the more likely that countries such as the United States and Australia will develop the capacity instead, said a senior researcher for Canadian think tanks. "The world isn't going to wait on Canada and B.C. If we can't get things done in this country, people will go and invest and build their LNG terminals elsewhere," said Philip Cross, a senior fellow at the Ottawa-based Macdonald Laurier Institute.

Cross said the regulatory process for LNG was "drawn out" in B.C., and also said that it took some time for the province to finalize its tax and royalty regime for the industry. "While we haven't been approaching this with a sense of urgency, other countries have been," said Cross, who is also a senior research fellow at the Resource Works Society in Vancouver. "Australia is building terminals left and right, [and] the United States seems to be able to put these plans into effect a lot more efficiently than we are.”

He added, "All this time that we've been talking and debating and hemming and hawing about this, the U.S. has been building an LNG terminal on the Gulf Coast. It’s ready to come online and there are four more like it right behind." Proposed LNG exports on the B.C. coast have been delayed by a combination of regulatory reviews, First Nations opposition, weakening global demand and low prices for LNG worldwide.

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

Gazprom reduces spending on gas pipeline to China

(Russia Beyond the Headlines; Feb. 9) - For the second year in a row, the Russian gas monopoly is reducing its budget for construction of the Power of Siberia pipeline, through which it intends to supply gas to China, and is postponing construction of a liquefaction plant that would have supplied LNG to Japan and South Korea. In 2016, Gazprom will spend 92 billion rubles ($1.17 billion) on building the pipeline to supply gas from Yakutia to China. Last year, Gazprom said it planned to spend twice that amount.

And earlier this month, Gazprom revealed another change in its Asian plans. The company postponed a project it launched in 2011 — the construction of a Pacific Coast LNG plant with a capacity of 10 million metric tons per year. One of the reasons for postponing the project may have been Gazprombank's refusal to finance it. According to the Kommersant newspaper, the decision could have been related to the western sanctions imposed on the bank.

Gazprom has not said there are problems with building the pipeline, which is to link the Chayandinsky deposit in Yakutia to China and the coast at Vladivostok. However, sources said the project is experiencing difficulties and overruns. In December 2015, Gazprom cancelled the largest tender in its history — to build 500 of the 2,500 miles. The other problem is the fall in energy prices. Premier investment company analyst Sergei Ilyin said the line’s break-even point is about $10 per 1,000 cubic feet of gas, but since the cost of gas is linked to oil, a return to that price is not expected for a while.

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

Shell postpones decision on B.C. LNG project to end of year

(Globe and Mail; Canada; Feb. 4) - British Columbia’s plan to become a major exporter of liquefied natural gas is facing mounting setbacks as energy companies grapple with weak prices and regulatory uncertainty. Shell disclosed Feb. 4 that its LNG Canada joint venture in Kitimat, B.C., is being delayed by about nine months, saying the partners are now aiming to make a final investment decision at the end of 2016 instead of the first quarter. Weak oil and gas prices are casting doubt on all 20 LNG proposals in B.C.

The Pacific NorthWest LNG project near Prince Rupert is at risk of delay, too, analysts said. That project, led by Malaysia’s state-owned Petronas, has been undergoing a federal environmental review since 2013. While the Shell-led venture has secured its environmental approvals, Pacific NorthWest and the much smaller Woodfibre LNG near Vancouver are waiting approval from the Canadian Environmental Assessment Agency. Those two proposals must deal with new federal rules on greenhouse-gas emissions. “Paralysis by analysis,” FirstEnergy Capital managing director Robert Fitzmartyn said.

As oil and gas companies watch their cash flow evaporate, that in turn is forcing them to scale back capital spending and decide whether to pursue, postpone or cancel projects. AltaCorp Capital analyst Dirk Lever said low LNG prices, a looming supply glut globally and opposition from some First Nations leaders are among the reasons it appears that Pacific NorthWest LNG “is now more likely to be postponed.”

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