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Pricing pressures for Australian LNG
Australia’s liquefied natural gas sector is facing increasing pressure amid Japanese Industry Minister Yukio Edano’s call last week for a change to the oil-linked pricing system for natural gas.
Edano’s remarks at an LNG conference come as four LNG projects in Australia, worth $104.3 billion, await final decisions.
Kwon Young-sik, who heads LNG procurement for South Korea’s Kogas, the world’s biggest buyer of LNG by volume, told The Wall Street Journal that the company wants to “maneuver away” from oil-indexed pricing.
In an agreement with Texas company Cheniere Energy in January, Kogas agreed to buy 3.5 million tons of LNG from Cheniere’s proposed Sabine Pass export plant in Louisiana. That deal is priced against the monthly Henry Hub gas price in the United States, rather than being linked to oil prices.
To put that price in perspective: Australian LNG was recently getting $16 per million British thermal units, compared with the Henry Hub price of $3.
Japanese utilities are also pushing for U.S. domestic gas prices to be factored into their long-term supply contracts, which could affect the outlook for Australian LNG projects not yet off the ground, says Gundi Royle, an analyst with global investment bank Moelis and Co., the Journal reports.
“Japanese buyers are demanding that Henry Hub is included into the index formula rather than just the oil price,” said Royle. “We think the pain is greatest for new projects unless they can re-engineer their projects with materially, say 20 percent, lower costs,” she says.
The world’s largest buyer of LNG, Japan has seen its LNG import double, to $72 billion, since Fukushima.
In a July report, the Australian Bureau of Resources and Energy Economics said it expects Japan’s LNG imports to increase at a rate of 2 percent per year.
Australian Federal Resources Minister Martin Ferguson maintains that Australia’s LNG projects won’t be affected by Japan’s calls to change the gas pricing system.
In an interview with The Weekend Australian following Edano’s remarks last week, Ferguson said Japanese firms are still signing on to Australian LNG projects despite the high prices and the emergence of cheap U.S. shale gas.
“While there is a debate about price, Japan, I suppose, has voted with its with its feet by continuing to invest in Australia,” Martin Ferguson said, noting investments such as gas giant Inpex in the Prelude LNG project, which is 82.5 percent owned and operated by Shell; and Mitsubishi and Mitsui in the Woodside Browse project.
“Even though every purchaser likes to get commodities at the lowest price, Japan has continued to invest in Australia’s LNG,” the minister added.
Still, Australia’s Macquarie Bank said in a recent report that amid the rise of U.S. shale gas activity and new discoveries in Africa, it sees “Australia’s market window closing quickly as the LNG supply story moves on to North America and East Africa.”
Copyright 2012 by United Press International