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."