Asian firms 'should pool gas resources'

The head of Malaysia's state oil company said Monday that Asia's national oil companies need to pool their natural gas resources to compete in an increasingly competitive market.

"As owners of the nation's oil and gas reserves, and to continue to survive in this challenging world, I hope that more national oil companies will form partnerships with each other," said Hassan Marican, chief of Petronas, in a keynote speech at the Gasex 2002 conference.

He said that in a market where customers are asking for more flexibility and spot cargo trade is beginning to emerge, pooling resources would boost economics of scale, better use of infrastructure and solve trans-border bottlenecks.

Hassan said Brunei, Indonesia and Malaysia, which together account for more than 65 per cent of total LNG trade in the region, have already agreed to pool some resources.

"We have agreed to synchronise our respective plant operations in order to maximise plant availability to ensure continuous and secure supplies to our customers. We have also agreed to pool our shipping capacities in order to leverage on excess capacities," he said.

While Petronas and Indonesia's Pertamina hold considerable clout in Asia's gas industry, Brunei announced the formation of its national oil company, Petroleum Brunei, last November.

Brunei LNG, a joint venture between Royal Dutch/Shell and the Brunei government, sold its first two spot LNG cargoes earlier this year when it found itself with extra supply due to lower demand from a Japanese customer.

The cargoes went to Spain and the United States. Meanwhile, the head of one of Asia's biggest gas importers said yesterday that Asia's gas industry must move toward more flexible pricing and delivery contracts to ensure further growth of the business.

However, Royal Dutch/Shell, one of the region's leading upstream developers, said long-term contracts will still be needed to support new gas projects.

Myung-Kyu Kim, chairman and chief executive officer of Korea Gas Corp (Kogas), told delegates at the Gasex 2002 conference that increasing market uncertainty required Asian gas buyers and sellers to revamp the rules of their business.

"The LNG (liquefied natural gas) business has prospered thus far on the basis of mutual trust and cooperation between buyers and sellers in a predictable market environment.

"However, it is questionable that the prosperity of the LNG business can continue to rely on strict, long-term contracts because of the increasing uncertainty resulting from tough competition in the energy consumption market," Kim said.

The liberalisation of LNG trading can only happen through flexible off-take agreements, varied contract durations and competitive pricing methods, Kim said.

"LNG delivery should follow buyer demand patterns so that buyers may efficiently cope with growing uncertainty in demand. Thus, the terms of annual equal delivery in force at present need to be eased," he said.

Kim said the current pricing environment, where Asian gas values are pegged to crude oil, has to be changed to reflect the various competing energy sources.

The vast majority of Asia's LNG trade - in which South Korea, Japan and Taiwan are the biggest buyers - is based on contracts of around 20 years with fixed price and shipping terms.

But Kim said the LNG shipbuilding industry, of which South Korea has a major share, was already showing signs of change, as about half of the LNG vessels currently on order for launching by 2005 were not bound to any long-term LNG contracts.

Most of the LNG ships now sailing Asian waters serve fixed, long-term supply contracts, and only a handful of spot cargoes are traded every year. However, Japan's top two power and gas utilities in March renewed contracts to buy LNG from Malaysia with new clauses that provide the buyers with flexibility on purchasing terms.

Under the new agreement, Tokyo Electric Power Co Inc has the option to curb annual purchase by 700,000 tonnes a year while Tokyo Gas Co Ltd can reduce its purchase by 500,000 tonnes.

However, Linda Cook, chief executive officer of Shell Gas & Power, said while more flexible terms may be an option for expansion capacity, long-term sales agreements are needed to secure financing for multi-billion dollar greenfield projects.

"There will be a balance going forward, but there is still an important role for long-term contracts as they are necessary to underpin new greenfield projects as partners need to finance construction of these projects," Cook said.

"As long as partners need third party financing, there will be a need for long-term contracts," she said.(*)