Regional LNG: Kogas seeks more term LNG contracts: Report
Monday, May 31 2004 - 07:43 PM WIB
Korea Gas plans to reduce the number of single cargoes it purchases in the so-called spot market by half to about 1 million metric tons a year and seek more contracts that ensure supply over three or four years, Chief Executive Oh Kang Hyun said in an interview.
``You can get into trouble if you depend on spot deals,'' Oh said. ``When you need them, others need them as well.''
Two winters ago, the Seoul-based company had to buy cargoes from as far away as the Mediterranean to meet obligations to customers after Japanese power companies snapped up LNG supplies in Asia. While supplies have risen since then as new LNG plants started up in Southeast Asia and the Middle East, rising crude oil prices and tighter environmental laws are prompting more utilities to switch to gas.
``Korea Gas has bitter memories of frantically seeking spot cargoes when they couldn't meet demand with contracted volumes,'' said Jay Ryu, a utility analyst at Mirae Asset Securities Co. in Seoul. ``That's the right way to go for them, particularly when oil prices remain at record levels.''
Higher oil prices are encouraging factories and utilities with flexibility to switch to gas. Korea's spot LNG purchases peak in winter, prompting competition with Japan and Taiwan as they scramble to meet heating demand.
In the 2002-2003 winter, Korea's government ordered power stations that can use both fuels to burn oil instead of gas after Korea Gas failed to secure enough LNG in the spot market. Japanese utilities had increased purchases of spot LNG cargoes after shutting nuclear power stations.
Since then, supplies have increased as producers including Exxon Mobil Corp., BP Plc and Royal Dutch/Shell Group build new plants or expand existing facilities.
Korea Gas is seeking price cuts of about two-fifths in talks for new contracts and more flexible supply terms in negotiations to replace a 20-year Indonesian contract that expires in 2007, said Oh.
``The new long-term LNG should be priced at about US$3 per million British thermal units, or at similar levels enjoyed by China for its recent deals,'' said Oh.
The company paid about $5 per million British thermal units for existing long-term contracts, according to Chung Song Bay, a manager at Korea Gas's finance team.
Korea Gas, which buys 2.3 million tons a year of LNG from PT Arun NGL in Indonesia under a 20-year contract, plans to enter negotiations in the second half to find a replacement.
``We are going to conclude a deal by the end of this year or early next year given the lead time of two to three years for delivery,'' Oh said.
Oh said he will also try to reduce the company's exposure to oil prices in new term contracts as LNG prices have been ``too rigidly'' pegged to oil prices.
``A rise in oil prices seems inevitable in the medium to long-term,'' Oh said. ``But LNG prices don't necessarily have to follow oil too closely, given the abundance of global gas development projects that could begin production in 2007 or 2008.''(*)