Major buyers move to renegotiate LNG prices as oil prices tumble

Falling graph
Source: DollarPhotoClub

As the oil prices tumble, the prices of LNG – indexed against the oil prices – should, at least in theory, decrease as well. But as the process of cooling the gas to a liquid form, shipping it and re-gasifying it at destination puts a lot of strain on the producers, the LNG trade is usually dominated by long term contracts. which differ considerably from spot prices.

But with the low crude prices, the glut of cheap shale gas in the U.S. and new LNG export terminals coming online soon, the big LNG buyers like India and Japan feel it is time to negotiate.

The world’s fourth largest buyer of LNG, India seeks to renegotiate liquefied gas prices with its biggest supplier Qatar. As The Economic Times points out, India buys 7.5 million tonnes of Qatari LNG a year on a long-term 25 year contract, indexed to a moving average of crude oil price. The price of LNG from Qatar comes close to USD 13 per million British thermal unit, while according to the U.S. Energy Information Agency the projected Henry Hub natural gas price averages $2.84/MMBtu in 2015.

Oil Secretary Kapil Dev Tripathi, who is also the chairman of Petronet LNG – an oil and gas company formed by the government to import liquefied natural gas and set up LNG terminals in the country – told the newspaper that the company “is working to mitigate the impact of the higher prices under the long-term contracts so as to bring the LNG prices more in line with the current market conditions.”

Indian appetite for LNG is huge and as a major buyer it is looking at diversifying its supply sources in search of better deals.

“A total of about 14 million tons per annum of LNG is imported into India currently and almost 80 per cent of these imports come to Petronet’s two terminals (at Dahej in Gujarat and Kochi in Kerala),” said Mr Tripathi, adding that this capacity will be raised by 50 per cent to 15 million tons by December 2016 and a further expansion to 17.5 million tons is planned.

Meanwhile Japan – world’s No. 1 importer of liquefied natural gas – is also seeking to renegotiate existing contracts to benefit from currently low spot prices.

In a recent negotiations between JERA Co. — a thermal fuel venture established in April by Tokyo Electric Power Co. – and an LNG seller, Chubu Electric Power Co., JERA pushed for removing the condition prohibiting the re-selling of purchased LNG to third parties. Should this clause be lifted, it would allow JERA to increase the volume of imports an renegotiate a decrease in price.

“Prices have been falling, and recently some seller nations have started reviewing their conditions of sale,” Hiroki Sato, vice president of JERA’s fuel procurement department, told The Japan News.

The world’s biggest importer of LNG, Japan purchased about 90 million tons of LNG in fiscal 2014, paying about $9 per million British thermal units for its LNG imports – approximately three times the U.S. price.

This situation, however, will not last forever. With the U.S. export terminals coming online – Sabine Pass is expected to be operational in December 2015 – the supply will grow considerably, and while current suppliers are benefiting from long-term contracts, they will have to re-think their pricing eventually.

The demand for LNG might also diminish. Japan is planning to re-open its nuclear reactors and invest heavily in wind-power and solar. India’s appetite for energy shows no signs of abating but the country still relies to a great extend on much cheaper coal for energy generation. China’s economy – although slowing down in recent months – will continue to devour huge amounts of energy but the country has been working hard to diversify its energy sources. LNG will only be one piece of a puzzle that includes imports via pipelines from Russia and Central Asia and China’s domestic shale gas production.

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