Gastech ’15: LNG importers see pricing flexibility as key to market success

SINGAPORE -- An LNG importers panel debate at this week's Gastech conference examined the potential impacts of lower oil and LNG prices on buyers and sellers over the next five years. The panel concluded that LNG contract pricing flexibility in an evolving and low-oil-price market will be essential to ensuring a successful balance between buyers and sellers.

The panel was moderated by Ian Catterall, the head of natural resources project finance for Bank of Tokyo-Mitsubishi. The six panelists were Shigeru Muraki, executive advisor for Tokyo Gas Co.; Jong-Ho Lee, senior executive vice president of Korea Gas Corp. (KOGAS); Hiroki Sato, vice president of the fuel procurement department for JERA Co.; Huang-Chang Lee, deputy CEO of the natural gas business of CPC Corp., Taiwan; Prabhat Singh, managing director and CEO of Petronet LNG; and Weiguo Shan, head of gas market research for China National Petroleum Corp. (CNPC).

Catterall harked back to Gastech 2014, noting that presenters and attendees at the Seoul conference and exhibition likely would not have been able to forecast the oil and gas market movements of the past 18 months. “Nor would they be keen to forecast the next 18 months,” he quipped.

Catterall noted that, at the time of Gastech 2014, greater numbers of importers were seen participating in the global LNG market, and many were seeking enhanced contractual and destination flexibility, more balanced pricing mechanisms, short-term contracts and spot pricing. The same remains true of LNG importers today. The question Caterall posed to the panel was: Has the oil price evolution since Gastech 2014 changed these outlooks—and if so, how?

LNG in a low-oil-price world. Caterall asked KOGAS’ Lee to share his perspective on the LNG market amid the oil price drop of the past year. Lee opined that, while low gas prices might be good for buyers over the next five years, buyers may hesitate to make long-term deals due to future uncertainties, such as economic recession and the greater use of coal for power generation. However, suppliers may also hesitate to put more LNG into market and may be forced to delay or cancel some projects, Lee said.

JERA’s Sato then shared information on what the five-month-old JV of major Japanese LNG importers Tokyo Electric Power Co. and Chubu Electric Power Co. hopes to achieve. Sato noted that the collaboration between the two companies maximizes their LNG buying power. Together, the firms will increase their yearly LNG purchase volume to approximately 40 million metric tons (40 metric MMt) by the time their upstream energy and fuel procurement businesses are combined in 2016.

“The objective for JERA is to be a game-changer in the LNG market,” Sato stated. “We will look at how to mitigate the Asian LNG premium and how to increase the liquidity of the Asian market.” JERA will be involved in all stages of the value chain, and the company will use that to maximize its portfolio, Sato said.

Evolving LNG business models. Next, Tokyo Gas Co.’s Muraki talked about the new LNG business model emerging in the US market, which he called “very different from the integrated LNG concept.” Muraki noted that, in contrast to companies like JERA, Tokyo Gas Co. is moving away from the integrated LNG model.

Muraki also said that the emergence of new pricing mechanisms in Asia will help make natural gas the most affordable and flexible fuel in the region. Trading will increase, and an Asian LNG hub and pricing scheme will be established. Additionally, Muraki spoke to the Japanese government’s mid-2015 announcement of its desire to source 20% to 22% of its energy from nuclear power by 2030. The advisor said that this goal may not be reached due to the expected greater use of coal to fuel utility operations. Nuclear power’s contribution to Japan’s energy mix is more likely to be capped at around 15% in 2030, Muraki said.

Petronet’s Singh picked up on Muraki’s comments regarding the new LNG business model, saying, “This whole process of production has moved from major players to smaller, niche players—the more players in the picture, the more the market opens up.”

Singh noted that “these players are willing to play the game on a shoestring budget.” Even at crude oil prices of $49/bbl, LNG is still being produced in the US, which Singh called “a very different market” from that of Asia-Pacific. When looking at the complete value chain, it may make sense for more companies to become involved in more and smaller market segments, Singh said. “The market is maturing, and specialization is coming in.”

Singh also touched on the state of India’s gas market. The country consumes approximately 120 million cubic meters per day (MMcmd) of gas, with imports making up 40 MMcmd to 45 MMcmd of that total. Singh noted that recent lower gas prices have provided an opportunity for India to import more gas and to build more infrastructure for the import and processing of greater volumes of gas.

The China factor. CNPC’s Shan next discussed China as a key global gas market. The research head acknowledged that China’s economic “new normal” of singledigit growth in energy demand, as opposed to the double-digit growth numbers seen just a few years ago, is reshaping energy deals with China’s partners and the country’s future demand outlook.

However, he also noted that shale gas is on the threshold of commercial production in China, and that the country could mark shale gas output of more than 5 billion cubic feet (5 Bcfy) this year. CNPC and Sinopec are promoting shale gas production for the sake of energy self-sufficiency, Shan noted.

With regard to gas imports, Shan does not see competition between pipeline gas and LNG supplies in China. “If economics are good, China can accommodate both pipeline gas imports and LNG import commitments,” he said. Even if the economic new normal continues, and gas demand does not expand so quickly, China will still see substantial gas demand accumulation by 2030, Shan said.

Shan next spoke about the planned pipeline that would bring gas from Russia to China along an eastern route, according to agreements signed between the two countries last year. While the design capacity for the eastern line is 38 Bcmy, capacity utilization would likely be lower than that because of China’s slowing demand, Shan said. Most of the gas would go to Northeast China, where demand is still increasing, and possibly to Shanghai.

Shan also noted that the Chinese government will seriously consider environmental protection policies in light of growing concerns over global warming, as well as how to encourage a better energy mix that includes more clean energies and cleaner-burning fossil fuels.

Lastly, CPC Corp.’s Lee rounded out the discussion with some comments on LNG pricing. He noted that today’s lower LNG prices will allow for readjustments in LNG contract pricing, which will help establish fairer prices for both buyers and sellers. “Sellers need (high enough) prices to justify their investments, and buyers need (low enough) prices to justify their gas purchases,” Lee said. “A balance is required.”