Leading liquefied natural gas (LNG) importers Japan and India on Wednesday launched a project to research global LNG pricing, AFP reported. The energy-hungry countries pay far more than Henry Hub prices for their imported gas because their supply contracts are linked to oil prices, and they said recently that they would like alternative pricing structures.
Last month, Japan's Ministry of Economy, Trade and Industry (METI) and the Asia Pacific Energy Research Centre held the Liquefied Natural Gas Producer-Consumer Conference in Tokyo. It was the first global conference in the field where people from the public and private sectors assembled from both the producer and consumer sides, according to METI.
More than 600 people involved in the field from 30 countries and economies around the world, including ministerial-level officials, attended the conference. They "discussed promoting the understanding of the long-term outlook for LNG demand and supply as well as developing transparency in LNG trading markets, as they are facing a paradigm shift, as shown by expanding production of unconventional gases, including shale gas in North America, and increasing demand for gases in Asia," METI said.
"For Japan, it is important not only to ensure a stable supply of LNG but also to procure it at low cost," said Japan Minster of Economy, Trade and Industry Yukio Edano, according to a summary of the meeting published by METI on its website. "It is a challenge to consider a new pricing system to replace the current system of linking the gas price to the crude oil price (gas-oil price link), which has lost its rationality, with one that will be beneficial for both producers and consumers. It is necessary for countries in the Far East region to communicate information and messages in this way."
A representative of Tokyo Gas complained about the high prices Japan must pay for supply and called for alternatives. "LNG prices for Japanese users are deviating far from the international standard because of the gas-oil link," the meeting summary said. "If the deviation continues, gas consumption will be curbed and a shift to other energy sources will proceed. Therefore, by introducing the Henry Hub pricing and a link to the European gas price, Tokyo Gas aims to bring LNG prices in East Asia to the international standard. Moreover, upstream development is necessary from the perspective of stable supply, and support by the Japanese government is also very important."
A representative of India's Oil and Natural Gas Corp. Ltd. said the country would like lower LNG prices, too. "For now, India is trying to obtain LNG prices linked to the Henry Hub price and is seeking competitive, independent prices," the meeting summary said. "On the other hand, India understands the need to maintain the motivation for producer countries to make investment, and it is hoping to create a win-win situation through dialogue."
Whether the global oil and natural gas price link will come undone when shale gas from the United States and elsewhere enters the world LNG market is widely debated. Bernstein Research Senior Analyst Neil Beveridge said in a recent note that the oil-gas price link is here to stay; however, others are not so sure (see Daily GPI, Oct. 10).
In Japan last month, cooperation was on the mind of Japan International Bank for Cooperation President Hiroshi Okuda, but also commodity prices and contracting. "After the earthquake disaster [at the country's Fukushima Daiichi power plant], LNG has become particularly important," he said. "When we look at LNG projects from the perspective of financing, the key is procurement stability based on long-term contracts and the price-setting method. In the LNG business, it is essential to manage opportunity, such as shale gas production, and risk, such as a cost increases."
Joe Oliver, minister of natural resources for Canada, which hopes to supply LNG to Asian markets from terminals planned for its west coast, asked for "cooperation" from Asian markets in the construction of LNG terminals. "Canada is a country that can satisfy Japan's hope to secure long-term, stable procurement of energy," he said. "Combining the favorable investment environment and sound fiscal condition with world-class reserves of resources, Canada aims to supply more energy to Japan and other Asia-Pacific countries."
Also at the conference, Qatar Minister of Energy and Industry Mohamed bin Saleh Al Sada spoke of "uncertainties" related to the environmental friendliness of shale gas development, according to the meeting summary. "It is necessary to carefully watch whether the LNG export capacity of the United States will be sufficient from the perspective of the global market," he said. "In addition, as the consumer-producer balance of power is changing, we must pay adequate attention to the risk that gas price reduction will deter future investment in gas development."
A U.S. Department of Energy representative was at the conference, too. "The proportion of shale gas in the overall gas supply in the United States is expected to jump from 23% in 2010 to 49% in 2035," the meeting summary said. "As for the supply-demand balance, the oversupply is being resolved, and after 2020, domestic supply will surpass the consumption rate and the United States will become a net exporter...Currently, the United States is wrapping up the investigation related to export licenses."
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