Asian LNG buyers and sellers continue to debate over pacts

While liquefied natural gas buyers in Asia continue to wrangle for shorter-term contracts, their suppliers say investment costs restrict them from signing deals with more flexible terms.

Currently, LNG contracts, which typically last 20 to 25 years on take-or-pay terms, provide gas producers with large amounts of investment funds while providing some guarantee of stable supply to consumers.

LNG buyers who are seeking more flexibility in term contracts are spurred by the ongoing restructuring and deregulation in the Asian gas industry, but sellers say a change isn't so easy for producers and won't happen overnight.

Players from both sides met in Seoul last week at the 13th International Conference & Exhibition on Liquefied Natural Gas, or LNG13, to continue the debate.

Baihaki Hakim, the president director of Indonesia's state-run oil and gas company, Pertamina (P.PTM), said in his opening speech at LNG13 that deregulation of the gas industries in South Korea, Japan and Taiwan presents new challenges to the Asian market and intensifies the consumers' cries for more flexible deals.

"New buying patterns will be introduced due to the restructuring in Asian gas industries," Hakim has said.

Buyers face difficulties in forecasting their own requirements as a result of demand fluctuations as consumers adjust to a deregulated environment, Hakim said.

Japan, the world's largest LNG importer, and South Korea, the second largest, are seeking a combination of short- and long-term contracts that will allow them to react to rapidly changing market situations. Japan, Korea Demand Shorter Term Contracts

Japan's largest power utility, Tokyo Electric Power Co. (J.TER), or Tepco, and the country's largest gas utility, Tokyo Gas Co. (J.TYG), are both seeking flexibility in LNG deals.

Tepco is considering "short-term contracts of around five years," a Tepco senior official has said last month.

Tokyo Gas is also seeking for flexibility in LNG contracts due to an uncertain outlook for the country's LNG demand, Tadahiko Ohashi, Tokyo Gas' chief executive economist, said last week.

According to Ohashi, about 70% of Japan's LNG purchases should be secured through long-term contracts and the rest through short-term and spot deals.

"We should reduce the term contracts to at least mid-terms, such as 10 years," Korea Gas Corp.'s (Q.KGS) chairman, president and chief executive, Kim Myung-Kyu said in an interview with Dow Jones Newswires earlier this month.

Japan currently imports about 54 million metric tons a year of LNG on a long-term contractual basis. This represents 54% of the world's LNG production. South Korea imports about 16.86 million tons/year of LNG on a long-term basis. Sellers Say Invest Requirements Prohibitive Factor

LNG suppliers say they hear the buyer's cries for more flexible term contracts. But as Pertamina's Hakim said, heeding them will require overcoming obstacles.

An official from Exxon Mobil Corp.'s (XOM) unit, ExxonMobil Indonesia Inc., said because of the huge costs involved in natural gas liquefaction and transport, shorter-term deals make investing in LNG projects less attractive.

Natural gas liquefaction and transport account for the bulk of the massive infrastructure costs in LNG projects.

Lower investment costs would make it easier economically for sellers to sign five to 10-year contracts, industry officials said.

"Sellers prefer to supply LNG throughout the year (for security)," the ExxonMobil official added. LNG producers need the security of stable marketing for such a costly project.

Bankers also have to be convinced to finance projects with shorter LNG term contracts, industry officials said.

Qatar's Oil Minister Abdullah bin Hamad Al-Attiyah said in an interview last week that considering the current LNG project investment requirements, bankers aren't likely to support contracts less than 20 to 25 years.

"It's not in the sellers' hands to decide...financial institutions would never agree to financing LNG infrastructure (on short-terms)," Al-Attiyah said. (*)