Asia LNG prices tumble on competition: Report

Competition among suppliers of liquefied natural gas (LNG) in Asia is hotting up, sending prices tumbling as big buyers such as China and India drive hard bargains in an oversupplied market, Reuters reported Tuesday.

Prices have dropped below U.S. market levels in a slide that is spurring demand for LNG and narrowing the price gap with coal, which accounts for 88 percent of the fossil energy resources in Asia, analysts and industry players say.

"New buyers coming in realised there is an oversupply and are negotiating hard -- the Chinese in particular and also the Indians," Peter de Wit, regional business director for Asia Pacific at Shell, told Reuters on the sidelines of an energy conference this week.

"Globally, there is an imbalance of prices between the Asia Pacific and for people selling gas into the United States," he said.

China recently struck a deal for two long-term supply contracts with Indonesia and Australia, while India negotiated a fixed price LNG import deal -- the first deal of this type for LNG, which is traditionally linked to oil prices, analysts say.

The cut-price Asian deals mean there can be a gap of as much as $3 per million British thermal units (mmBtu) between LNG delivered into China and into the United States.

"LNG prices are under pressure -- China made an extremely good negotiation for its first LNG contract. There is a possibility of Chinese contagion of prices," Claude Mandil, head of the International Energy Agency told the conference.

Competition is set to intensify further as Qatar, which aims to be the world's largest LNG exporter raises its output. Not only are production costs in Qatar low, but it is well placed to ship gas either east into the Asian Pacific market or west into the Atlantic Basin.

Qatar has recently signed joint ventures with ExxonMobil, which envisage the world's biggest production units and using much larger LNG tankers which will cut costs significantly.

"The economies of scale in shipping and liquefaction will allow the Qataris to project LNG further for the same cost. This will allow them to compete with producers who are closer to the market," said Frank Harris, a consultant at UK-based Wood Mackenzie.

China, where energy demand is booming, has signed LNG import contracts with BP's Tangguh project in Indonesia and the North West Shelf project in Australia in which Shell is a shareholder.

Tangguh is due to export 2.6 million tonnes a year of LNG to the Fujian project from 2007. North West Shelf will export at least 3.3 million tonnes to Guangdong province from 2006, with most of the fuel for power generation.

Shell 's de Wit said the Chinese negotiated a fairly flat price for the Guangdong contract with just small movements to reflect changes in crude prices.

He declined to be more specific about the price but Wood Mackenzie said the deals allowed for a variation of just 50 cents per million British thermal units (mmBtu) related to movements in oil prices.

"This removes most of the volatility out of the price. Price volatility has been an issue and we are getting close to a fixed price," Wood Mackenzie's Harris said.

Competition was forcing suppliers to move away from long-term LNG contracts based on volatile oil prices and agree deals with more stable pricing, analysts said.

The Chinese are paying about $3 per mmBTU for gas delivered into Guandong province from the Australian North West Shelf project, based on oil prices of $20 a barrel, he said.

"This is about a dollar off the price of contracts have traditionally been to Korea, Japan and Taiwan," Harris said.

"When rollover of these contracts comes, they will put pressure on for lower prices," he added.

Energy-hungry India imported its first LNG cargo in January, becoming the fourth Asian nation to use LNG.

Petronet LNG Ltd, a consortium of state-run energy firms, imported the cargo into a terminal at Dahej in a deal with Qatar's Rasgas.

Harris said the deal was for a fixed, FOB price for the first five years, adding this was the first time a term LNG contract had been completely de-linked from oil prices.

Neither Petronet nor Rasgas were available for comment.

Nearly all India's natural gas is sold to the power and fertiliser sectors, which have financial problems and have demanded a low price for imported LNG.

Shell 's de Wit said he thought the market would stabilise in the next few years once the Chinese import terminals open and as demand to Japan's power sector grows.

"Asia Pacific will move from a buyers' market to equilibrium in the next three to four years," de Wit said.(*)