Watch out: LNG buyers’ cartel is coming
Liquefied natural gas (LNG) prices could be dealt a further blow if the plans by the biggest LNG buyers to form a cartel materialise.
Japan’s Jera Co. said it is in talks with other LNG companies to create an alliance of buyers that account for more than one-third of global trade.
According to Hiroki Sato, Jera’s vice president of the company’s fuel buying department, the company is seeking to cooperate with Korea Gas Corp. and China National Offshore Oil Corp. on liquefied natural gas procurement and investment, adding that a memorandum of understanding may be signed soon.
Jera has said the combined Tokyo Electric and Chubu Electric purchases would be about 40 million metric tons a year of LNG. Korea Gas imported 31.4 million tons in 2015 and China National Offshore imported 14.1 million tons in 2014, according to the companies. Global LNG trade rose 1 percent in 2014 to 239.2 million tons, according to the latest annual report by the International Group of Liquefied Natural Gas Importers.
Asian spot LNG prices fell below $5 per million British thermal unit for the first time last month, extending its tumble from a high of $19.70 in February 2014. Cargoes bought through long-term contracts, which are traditionally linked to oil, may fall to a low of about $4.10 per million Btu by June, Credit Suisse Group AG said in a report.
A deal between the companies may lead to the creation of a potentially dominant bargaining alliance as buyers band together to take advantage of new supply from Australia to the US that is tilting negotiating power in favor of consumers.
The deal will benefit smaller companies outside the group as lower prices would be passed on to other buyers, Sato said. The alliance members would also be able to swap or trade cargoes among themselves to help balance supply between their operations.
Supply glut changed the rule
LNG supply glut also emboldened the buyers. Thai-state owned oil and gas company PTT said recently that it will delay its long-term LNG buying plans and opt instead to make purchases on the spot market. The country inked long-term contracts with both BP and Shell in August 2015 to procure 1 mtpa from each oil company. At the time PTT was also in talks with Qatargas to extend a 2 mtpa 20-year supply deal already in place.
While LNG prices have dropped in lock step with the plunge in oil prices, with a supply glut the situation can only worsen well into the next decade.
LNG prices indexed to crude oil
While the shape of the market with the coming of the buyers’ cartel remains uncertain, LNG prices have been reeling from the effect of low crude oil prices. In an exclusive interview with BusinesDay West Africa Energy in December 2015, Isa Inuwa, Deputy Managing Director of Nigeria Liquefied Natural Gas, has said that LNG prices had been negatively affected by the low crude oil price.
“Our prices are indexed to crude, at least a significant portion of our portfolio. The price of gas is indexed to Brent, hence if there is a fall in the prices of Brent, it means we will sell for less”.
Nigeria should be worried about LNG buyers’ cartel
Nigeria should be worried about the coming of the LNG buyers’ cartel as the biggest importers of LNG from the country are the prime movers. According to the US Energy Information Administration (EIA), Japan is the largest importer of Nigerian LNG and imported 23 percent of the total in 2013, followed by South Korea 17 percent and Spain 14 percent.
Revenue-wise, Nigeria Liquefied Natural Gas Company Limited (NLNG) generated some 85 billion dollars from exports since its inception 15 years ago, according to official statement from the NLNG in 2015.
Babs Omotowa, NLNG chief executive said the company had paid 30 billion dollars in dividends to its shareholders over the years, including the government, which owns a 49-per-cent stake through the Nigerian National Petroleum Corporation (NNPC).
Nigeria currently exports 22 million metric tons of LNG, making it the world’s fourth largest LNG exporter along with Qatar, Malaysia, Australia and Indonesia.
Estimates of Nigeria’s LNG exports vary among sources, with the BP 2014 Statistical Review of World Energy placing it at almost 800 Bcf in 2013 and the OPEC Annual Statistical Bulletin estimating it at 866 Bcf in 2013. Nigeria’s LNG exports accounted for about 7 percent of globally traded LNG.
Uncertainty over stalled LNG projects
The convergence of low LNG prices, a looming glut of supplies and the coming of LNG buyers’ cartel have rendered stalled LNG projects uneconomic and cast further doubts of the projects coming on-stream. Brass LNG and OKLNG have been stalled for years because investor confidence is lacking. Investors in Brass LNG and OK LNG keep pulling out and the current market situation makes the bad situation worse. The projects are still in the early engineering phase and are both running several years behind schedule.
FRANK UZUEGBUNAM