Shifting energy markets could reshape LNG industry: analyst

Tuesday, 31 August 2010

The LNG industry is being buffeted by forces in other energy markets that could determine whether proposed projects are built and how LNG sales are priced, an industry observer said late Monday at an LNG conference in Perth, Australia In the short term, prospects for the Asia-Pacific market appear bullish, Brian Johnson of Pricewaterhouse Coopers Australia said in a talk at the 5th Annual LNG World conference.Annual capex for energy development in the Asia-Pacific region, he said, "is expected to grow strongly, fueled by giant LNG projects competing to supply growing Asian energy requirements."Gas and LNG "is where the big investment is going forward," with multiple projects aiming to fill a looming supply gap in regional gas demand in 2013-14, he said.Along with growing energy demand in Asia, LNG also stands to gain from public concern about the environmental impacts of energy use. Concerns about climate change are less of a driver for low-carbon energy sources than a few years ago, Johnson said, but pollution abatement -- reducing SO2, NOx and particulate emissions -- remains an important consideration.But in North America, shale gas development has weakened gas prices, though President Barack Obama's moratorium on deepwater offshore drilling could help gas prices in the medium term, Johnson said. He voiced doubts, though, as to whether shale gas offers an attractive long-run investment."In the US, $4/Mcf [price for gas] isn't sustainable at funding costs [for shale gas] of $3.8/Mcf on average and operating costs of $1.7/Mcf," he told conference attendees. Energy companies are cutting their budgets for developing shale gas, he said, while shifting their focus to extracting shale oil.In global LNG export markets, a significant number of contracts are being underwritten for shorter durations. Many contracts since 2002 run for less than 10 years, Johnson said, "with several recently for one year or less...major Asian buyers are taking smaller volumes of gas for shorter periods."Still, though the number of short-term contracts has grown over the past eight years, he said, most LNG contracts feature longer-term sale agreements.Pricing trends remain murky. Index formulas are not standardized and in Asia pricing is largely indexed to oil, Johnson noted. Further, large disparities can be seen in global markets for conventional fuels."European and Asian gas markets are diverging from the Americas in their forward price outlook based on the fundamentals of their respective markets," he said. "Crude oil and gas prices are beginning to diverge in the Americas, while in Europe and Asia the ratio of crude oil prices to gas has decreased."Johnson said he saw several market developments that could determine how pricing indices are fashioned in the future, including greater price-averaging periods to reduce pricing volatility and price moderation produced by eliminating the so-called S-Curve from formulas."The degree of support for transparency in global LNG pricing through a standardized index is mixed," he said. "Support will grow with increasing flexibility in the market, and additional facilities and market participants."

Source: Platts