Skepticism over lower LNG prices

After two days of excited arguments for market changes that would lower prices, world buyers of liquefied natural gas got a snappy retort Wednesday from executives and experts at the LNG 17 conference in Houston.

Several buyers, from Japan, India and elsewhere, said that they were paying too much for LNG that had long been linked to oil prices. They suggested the establishment of an Asian LNG trading hub and pushed sellers to take into account low-priced natural gas in the United States.

The ideas, along with others that would lead to lower prices for major consumers, received polite denials from some speakers, and direct rejections from others at the 17th International Conference & Exhibition on Liquefied Natural Gas at George R. Brown Convention Center.

“It’s a dream,” said Feridun Fesharaki, chairman of consulting firm FACTS Global Energy in responding to discussion about an Asian trading hub that could lead to lower import prices for major LNG buyers in Japan, Korea, China and India. “See, for the dreams to come true you have to have some elements of the dream.”

Exports: Asian nations eagerly eye cheap US natural gas

He and others said there just wasn’t enough tradable natural gas available to even supply any sort of exchange that would lead to lower prices, since most of the LNG has been tied into long-term contracts.

Even Asian buyers hoping to import American LNG from projects along the Gulf Coast have signed 20-year contracts that would leave that supply basically unavailable for market trading, Fesharaki said. And that’s if large quantities of American natural gas are exported.

“Number one, you have to have liquidity,” Fesharaki said. “If you don’t have liquidity, you can’t have a hub. People talk about the future market, but you have to have physical liquidity before you have paper liquidity.”

It is unlikely that there would be a vast amount of additional LNG production available for trading any time soon, since new projects are expensive and banks have only assisted in paying for them when companies secure long-term contracts from buyers, said Jonathan Shepard, head of BP’s global LNG portfolio.

Elana Burmistrova, managing director of oil, petroleum and petrochemicals for Russia’s Gazprom – the world’s largest natural gas producer – struck a similar tone.

While low U.S. natural gas prices have drawn the attention of buyers and producers worldwide, no one is certain how much American LNG will be available to export, Burmistrova said.

“I was asking everybody here about what would be the potential volumes which would go out of the United States,” she said. “There were very different versions of it, but I’m not sure we can base our pricing mechanisms on volumes we are not certain about right now. And, as you know, there are different debates on that matter here in the United States.”

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So far just one LNG export project – Cheniere Energy Partners’ Sabine Pass terminal in Louisiana – has been approved to ship American natural gas to any country. Several applications for federal permits are pending with the U.S. Department of Energy, but no other decisions have yet been made.

Another idea, which was discussed by buyers from Japan, the world’s largest LNG consumer, involved a pipeline between Japan and Russia. But Burmistrova and others said a pipeline solution, which would circumvent the LNG market, was unlikely.

Gazprom had weighed the idea of a pipeline, she said.

“We considered that seismic activity is very high in the region,” Burmistrova said.

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While some cast doubt on the ideas, buyers cast them as inevitable developments.

LNG prices are clearly flexible and can be lower for buyers, since the same producers may sell for vastly different prices to Japan and India, said B.C. Tripathi, chairman and managing director of GAIL, India’s largest state-owned gas company.

“Is it the real price, or is it the opportunity cost?” Tripathi said. “So we have to first address this issue. It’s not merely the project cost in my opinion.”
In an effort to get lower LNG prices, GAIL has made a small investment in shale gas production in the Eagle Ford play, Tripathi said. The company is looking for other similar opportunities, he said.

The company’s goal is “to be as a partner there to co-develop this asset so that it brings value to the major operater and it brings security of gas and security of supply to GAIL and also brings some sort of physical hedge to GAIL,” he said.

Though Tripathi and Chen Bo, an executive with China’s Sinopec, were among those pushing for American natural gas prices to have a larger influence in the global LNG market, Fesharaki said that would not make a difference.

“It’s just not relevant,” said Fesharaki. He said that prices of all natural gas, once processed and shipped to Asia, would be in the same range of around $12 and higher.

“If we want to look at the index and we have an index in Asia, then we look at U.S. gas delivered to Asia, European gas delivered to Asia, and you take the average of that,” he said.

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