Oil and gas news briefs for June 18, 2015

Supply build pushes fundamental changes in global LNG markets

(Wall Street Journal; June 15) - As billions of dollars of investment continues to flow into natural gas production and exports globally, there are signs that supplies of the energy source have already caught up with demand. Prices of liquefied natural gas have fallen to record lows in Asia this year, enabling buyers to drive a harder bargain in contract negotiations. With the U.S. Gulf Coast due to start shipping LNG late in 2015, concerns about potential future shortages of gas have dissipated, at least for the near term.

 

Almost 5.8 trillion cubic feet of additional annual export capacity will be operational globally by 2020, about 40 percent above current levels. As the gas gushes, Asia’s LNG market is being transformed and contract terms are changing. Until recently, LNG was mostly supplied under rigid conditions set out by gas producers. Buyers would typically have to commit to 20-year deals, at formulas linked to oil prices, with conditions such as bans on reselling cargoes that were enforced even after a shipment left port.

 

As markets have changed in buyers’ favor, they are opting for shorter-term contracts, sometimes as little as one year. Pricing is becoming more flexible, too. “Buyers have the curse of choice. They can buy at an oil-linked price, they can buy at a (U.S.) Henry Hub-linked price and they can buy on a European gas-based price,” said Matthew Arnold, head of LNG at EDF Trading. Terms that were rarely disclosed publicly are becoming more transparent, industry sources said, and pricing is becoming less complex.

 

“Asian buyers are in a strong position to negotiate for further concessions,” said analysts at BMI Research. Already, buyers in China, Japan and South Korea are using the prospect of LNG shipments from the U.S. as leverage in seeking lower prices and better terms from sellers such as Russia.

Oil and gas news briefs June 15, 2015

Petronas issues conditional approval for LNG project in B.C.

 

(Globe and Mail; Canada; June 12) - An international consortium June 11 committed to building a liquefied natural gas terminal near Prince Rupert, B.C., as long as the project receives federal environmental approval and a provincial tax deal. Pacific NorthWest LNG, led by Malaysia’s state-owned Petronas, said conditional approval is a crucial milestone. After waffling last year and even threatening to cancel the project, the group is striving to start construction by the end of 2015 and launch exports to Asia in 2019.

 

Petronas and its Asian partners stipulated that two conditions must be met. “The final investment decision will be confirmed by the partners of Pacific NorthWest LNG once two outstanding foundational conditions have been resolved,” the consortium said. “The first condition is approval of the project development agreement by the Legislative Assembly of British Columbia, and the second is a positive regulatory decision on Pacific NorthWest LNG’s environmental assessment by the government of Canada.”

 

The Canadian Environmental Assessment Agency began its review of Pacific NorthWest LNG in April 2013, with the latest delay focused on the project’s potential impact on nearby salmon habitat. The developers also must deal with opposition from the Lax Kw’alaams Band, which is particularly concerned with salmon habitat issues.And the project needs B.C. lawmakers to endorse a long-term deal providing certainty on royalties and taxes that the government signed with the developer last month.

Oil and gas news for June 11, 2015

Gas demand growth slipping in China

(Platts; June 10) - China's 2020-2030 natural gas demand is expected to be 13 percent lower than previously forecast, which will lead to an oversupplied market and weaker prices, consultancy Wood Mackenzie said June 10. China’s demand is now expected to be about 12.7 trillion cubic feet in 2020 and 19.8 tcf in 2030, down from earlier forecasts of 14.9 tcf and 22.6 tcf, respectively, due to short-term and structural drivers, Wood Mac said. Even at the lower forecast, demand in 2030 would be three times more than 2014.

 

"Short-term drivers include low oil prices and high domestic gas prices, reversal of environmental policies, competition from coal and hydro and warmer winter weather," said Gavin Thompson, WoodMac's principal gas consultant. "Structural factors include the switch from industrial production to the service sector as a driver of economic growth." Despite weakening demand growth, Central Asian pipeline gas deliveries into China are continuing to rise, as are LNG imports.

 

"There is an oversupply of contracted LNG into the market, particularly during periods of low seasonal demand," Thompson said. Chinese oil and gas companies are pursuing numerous channels to reduce volumes, including efforts to renegotiate deliveries and pricing, and reselling cargoes into the Pacific market when it can reach agreements with suppliers, WoodMac said. China last year produced about 70 percent of the 6.5 tcf of gas that it consumed. It imported about 1.1 tcf of pipeline gas and almost 1 tcf as LNG.

Oil ans gas news briefs June 8, 2015

Citigroup analyst says low LNG prices will not last

 

(Sydney Morning Herald; June 5) - Current low prices for liquefied natural gas cannot last long term as buyers will need to accept higher prices to support new projects and the returns required for investors backing the multibillion-dollar ventures, Citigroup's top energy banker in Asia-Pacific said. Philip Graham, co-head of Asia-Pacific energy and utilities at Citigroup, points to a "a disconnect" in the current market for LNG, where prices have slumped because of the drop in crude oil prices, falling short of levels needed by LNG project proponents to justify heavy investments.

 

In Asia, LNG contract prices are indexed against oil prices, so a change in crude prices flows through to LNG. Graham, speaking from the World Gas Conference in Paris, said the current oversupply in the LNG market was weighing on prices, but prices would have to move higher in the longer term, driven by the economics of bringing on new supply. "It's the sponsors putting the $20 billion in the ground that require reasonable return for investment that are going to set where long-term pricing goes," he said.

 

"There will still be long-term contracts because if you want supply to come into this system you are going to have to pay a return that is commensurate with what investors are looking for." Graham also discounted talk among buyers about lower LNG prices based on trading hubs. "While the buyers like to talk about hub-based pricing and lower pricing, it might work for the next few years while we're in an oversupply market. But in the long run, you get back to economic decision making around big investments that deliver economic returns," he said. "So were going to see a move up in prices for LNG."

News briefs

Oil companies promote gas as cleaner than coal for power generation

 

 

(Bloomberg; June 2) - Oil companies that have pumped trillions of barrels of crude from the ground are now saying the future is in their other main product: natural gas, a fuel they’re promoting as the logical successor to coal. With almost 200 nations set to hammer out a binding pact on carbon emissions in December, fossil-fuel companies led by Shell and Total say they are refocusing on gas as a cleaner alternative to the cheap coal that now dominates electricity generation worldwide.

 

That has sparked a war of words between the two industries and raised concern that Big Oil is more interested in grabbing market share then fighting global warming. “Total is gas, and gas is good,” CEO Patrick Pouyanne said June 1, in advance of this week’s World Gas Conference in Paris. His remarks echoed comments two weeks earlier by Shell CEO Ben Van Beurden, who said his company has changed from “an oil-and-gas company to a gas-and-oil company.”

 

Shell began producing more gas than oil in 2013; Total did it in 2014. ExxonMobil’s gas output rose to about 47 percent of total production last year from 39 percent six years ago. Shell, Total, BP and other oil companies said in a joint statement June 1 that they are banding together to promote gas as more climate friendly than coal. “The enemy is coal,” Pouyanne said. A key strategy for gas producers to push this agenda is asking governments to levy a price on carbon emissions from power plants. That creates an economic incentive to switch from coal to cleaner options.

Oil ans gas news briefs June 1, 2015

U.S. LNG exports add to global shift away from oil-linked pricing

(Financial Times; London; May 28) - When the first U.S. shipment of liquefied natural gas leaves the Gulf Coast later this year, gas trading will fulfill its long-held promise of going truly global. Cheniere Energy’s Sabine Pass terminal in Louisiana is expected to load its first LNG tanker around December, bringing U.S. shale gas to world markets at a time when trading of the fuel is picking up.

 

This has mobilized commodity traders who have been positioning themselves for increased trading activity and a move toward more LNG contracts being based on the price of natural gas. Up to now, the majority of LNG long-term contracts have been priced against crude oil. And fewer supply deals may be structured for a long period of time, say a decade or more, as supplies increase and as the price of LNG moves away from being linked to oil.

 

“It is not going to happen overnight, but [trading] volumes will build up over the next few years,” said David Thomas, head of LNG trading at Vitol, one of the world’s largest independent commodity traders. “The availability of U.S. exports will ultimately influence prices around the world.” Even though producers need to lock in contracts to fund the construction of multibillion-dollar liquefaction and loading terminals, buyers’ appetite for oil-linked contracts has fallen. Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said the move away from traditional deals is unavoidable.

Oil and gas news briefs May 28, 2015

Japanese LNG-buying venture wants to pay lowest costs in East Asia

(Reuters; May 28) - A venture set up last month by Tokyo Electric Power and Chubu Electric to handle their fuel business aims to become the cheapest liquefied natural gas buyer in East Asia, its president said. Jera — the new venture’s name — is set to become the world's single biggest buyer of LNG, exceeding Korea Gas, with annual purchases of nearly 40 million metric tons once it fully integrates fuel procurement next year. It plans to use its bulk to drive prices lower, President Yuji Kakimi told Reuters.

 

"Jera has a role to play in tackling how to reduce Asian prices," he said. "The target is the cheapest price in East Asia that is not out of line with prices in Europe and the United States.” Asian buyers of natural gas have traditionally paid higher prices, a so-called Asian premium to gas prices in the United States and Europe because of the high cost of LNG delivered on tankers and relatively less extensive pipeline networks.

 

LNG prices are typically linked to oil and have come down in recent months with the slump in crude prices. Jera's purchasing power could be a factor in decisions on LNG projects that require huge investment and long-term contracts to ensure their viability. For example, Kakimi said, Jera could buy up to 4 million tons a year from a single new project. Jera also will try to limit oil-linked supplies to around 50 percent of purchases or less, while increasing the share linked to U.S. or European gas price benchmarks.

Oil and gas news briefs May 26, 2015

Russian state bank agrees to guarantee $3 billion in loans for Yamal

(Reuters; May 21) - Russian state development bank VEB on May 21 pledged $3 billion in loan guarantees to Novatek to back its liquefied natural gas project Yamal LNG as the producer's access to global funding is limited by Western sanctions against Russia over the country’s actions in Ukraine. Yamal will be Russia's second plant to produce and export LNG when it starts up — expected in late 2017, according to Novatek.

The Arctic gas project is estimated at $27 billion, with $10 billion to $15 billion expected from Chinese banks. France's Total and China National Petroleum Corp. each hold 20 percent in the project, with Novatek at 60 percent. VEB had been in talks with Novatek to provide a $1 billion loan to Yamal LNG. "Now, the amount of risk we are taking under the project is tripling. At least we expect no hard cash would be needed," VEB chairman Vladimir Dmitriyev said after the bank's supervisory board approved loan guarantees.

Russia's Sberbank and Gazprombank are among other domestic banks expected to support Yamal. VEB, Sberbank and Gazprombank are all under Western sanctions, limiting their ability to borrow on Western markets. Novatek is also under the sanctions. Last month, Total CEO Patrick Pouyanne said sanctions have complicated funding for Yamal. In addition to VEB’s guarantee, Novatek has secured $3 billion from Russia's National Wealth Fund and has been in talks to sell 9 percent in Yamal to raise funds.

 

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