Asian buyers may pay up for LNG contract flexibility

Asian liquefied natural gas (LNG) buyers are likely to see less rigid terms in forthcoming long-term contracts, allowing some respite from the tyranny of oil-linked prices, but that doesn't mean the gas will be cheap, reuters reported recently.

The wider opening of hungry U.S., European, Chinese and Indian markets to LNG is shifting the balance of power to sellers, allowing them to dictate higher prices amid a 2-year boom in global energy markets, analysts and some officials say.

Rising production costs as a result of higher steel and other commodity prices are also pushing suppliers to seek higher prices for LNG-natural gas cooled into a liquid state for tanker transport around the world.

"A buyers' market is turning into a sellers' market," Fereidun Fesharaki, president of energy consultancy FACTS, told Reuters during the Asia Oil & Gas Conference last week. "Some buyers are still living in fantasy land. They still expect to get something, but in fact the terms are now being dictated by the sellers," he said. LNG prices slumped several years ago when new export capacity emerged from the Middle East and Asia amid uncertain demand.

Buyers like China and India were able to shift some contracts onto a fixed-price basis, moving away from oil-related schemes to pay as little as $3.50 per million British thermal units and making them immune to a doubling in oil prices since then.

But the world's biggest LNG buyers-Japan, South Korea and Taiwan-are sitting on legacy contracts signed two decades ago, when prices were closely pegged to fluctuating crude markets.

They are seeking lower oil linkage and more flexibility such as lower take-or-pay volume, shorter maturities and easier terms on shipping and deliveries as they renew tens of billions of dollars worth of contracts. But suppliers are balking.

"Differing perceptions of the extent and speed of market change will make negotiations challenging and slow," said Andrew Faulkner, vice president at the north Asia gas division of Shell, a top global LNG supplier. Some buyers are investing in LNG production, shipping and receiving terminals to better manage costs.

Sellers now are looking down the road to the profusion of LNG import terminals that have been proposed in massive markets such as the United States and China, increasingly convinced their supplies will be in high demand by decade's end.

"With the U.S. market, supply is returning to balance. The ground-breaking contracts in China were originally expected to be sustainable, but the view has quickly changed," said Mohd Suhaimi Yassin, an executive at Malaysia LNG.

Asia-Pacific LNG demand is expected to more than double to 180 million tonnes per year (tpy) by 2020, Shell estimates, but even sharper growth is expected in the United States, where indigenous natural gas production is in decline.(*)