REGIONAL LNG: Petronas urges LNG buyers to be reasonable with sellers
Tuesday, June 17 2003 - 05:31 PM WIB
Presenting his paper on "The Evolution of LNG Business Model and The Emerging Market Structure" at the 8th Asian Oil and Gas Conference 2003 held here, Petronas' vice president of gas business, Abdul Wahab Hashim said buyers were now asking sellers to give more flexibility in their contracts in terms of volume, pricing, destination and contract period.
"The opportunity to create a greater flexibility in the LNG supply package gained ground as buyers leveraged on the oversupply situation," he said.
Abdul Wahab was raising his comments amidst concerns among LNG sellers following A$25 billion contract for Australia to supply gas to China's Guandong province at very low prices.
This inevitability had put pressure on LNG suppliers amidst claims that the market had an access supply of LNG.
He said with the discovery of more gas reserves and a proliferation of LNG projects in the Middle East, expansion of existing projects in Malaysia, Indonesia and Australia, a "preceived" over supply situation developed.
However, on the buyers end the ongoing deregulation process in most consuming nations had resulted in an aura of a "buyers market" scenario.
He said these phenomena had transformed the traditional business structure into an "open business model" where the buyer and seller were given the flexibility in their investments decision, either to participate in the upstream or downstream in the LNG business chain.
Buyers are seeking shorter term contracts of five years duration defined as "short term" or "spot" contracts to be included in the total re-negotiated new supply packages.
"Even the longer term contract contained a price re-negotiation clause that ensured a price review after a given usually three to five years," he said.
He said equity participation was introduced as part of the sales deal with sellers and buyers going beyond the liquefaction stage into the upstream gas exploration.
He said buyers now demanded in their enquiries or tenders a share in the upstream gas reserves as well as the shipping entity.
"Not satisfied with a direct link to the S & P contracts (off sales & purchase contract), some buyers even went further upstream by buying directly into a gas reserve that has only the potential to be developed into a commercial LNG project," he said.
Unable to secure certain and firm outlets for their LNG, sellers also began to move downstream investing in gas utilization projects to market their own liquefaction capacities.
Typically, a major venture such as, a power project of 1,000 to 2,000 megawatt size became the base load and an import and gasification terminal established at a location that would lead into further market developments downstream either connecting to existing transmission pipelines or constructing one in the process.
On the aspect of deregulation as a treat or opportunity, Abdul Wabah said the ongoing deregulation of gas and power sector in Japan and soon in South Korea had and would to a certain extent change the landscape of the LNG business.
Through deregulation "new entrants" and "true competition" would emerge and market uncertainties were inevitable.
"On the onther hand, the opening of the the "sleeping dragon" of China and liberalisation of India, presented both opportunities and threats," he said.
From Petronas' perspective, it would only mean that there was a need to sharpen their business acumen to be able to pick up the opportunities and develop the skills to avert the threats presented by a changing environment and to become ever more resilient, he said.(*)