GAS AND POWER: LNG producers look for ways of raising prices
| Published date | 01 November 2016 |
| DOI | http://doi.org/10.1111/oet.12436 |
| Date | 01 November 2016 |
GAS AND POWER
LNG producers look for ways of raising prices
Gas markets are witnessing the curious phenomenon
of large numbers of proposa ls for new liqueed natural
gas (LNG) export schemes at a time of depressed gas
prices and strong competition from cheap coa l and
oil. At present, there appears to be no way of making
these new schemes economic. e result looks like
being a battle for market share among the main gas
producers, thereby prolonging the current period of
low prices. Some producers see restricting supply as
the only solution, perhaps by the establishment of an
OPEC-style producers’ cartel; but several of the largest
gas exporters prefer to compete for market share rather
than cutting their output. Reductionsin supply are more
likely to come about as a result of the postponement or
cancellation of future projects.
Falling prices
Gas prices have been falling steadily since 2012. LNG
prices paid by the world’s largest buyer, Japan, went
down by 38% between 2012 and 2015 and are set to fall
further in 2016. Based on gures for the rst ten months,
this year’sdecline lo oksto b e in the regionof 35% versus
2015 (see Figure A). Import contract prices at the start
of the fourth quarter of 2016 are about $6.60/mnBTU.
Spot prices are even lower, at about $5 mn BTU with
a further year-on-year decline of 13.8% predicted for
2017-2018 [1].
Prices are likely to remain under downward pressure
in Japan and elsewhere in Asia as buyers try to switch
some of thei r purchases away from long-term supply
contractsto lower priced spot deals. ere isalso a grow-
ing desire among gas importers worldwide to reducet he
role of oil prices in the formulae that set the base-prices
they pay and move toward gas pr ices that are related to
gas rather than oil markets. Buyers look to be in a good
position to do this thanks to the large number of new
suppliers now entering the market.
e Japanese hope to encourage the move to
gas-on-gas pricing by establishing an LNG trading
hub based in Japan that would provide an open and
transparent market, which would, in turn, provide a
spot-relatedpricesuitableforuseinfuturelong-term
supply agreements for buyersin Asia. It is hoped to have
the trading hub in operation within ve years. As the
world’s largest importer of LNG, Japan pays some of the
world’s highest prices for its gas.
0
2
4
6
8
10
12
14
16
18
2006 2007 2008 2009 2010 2011 2012 2013 2014 20162015
cif Japan
($/mn BTU)
Source: (2006-2015) BP Statistical Review of World Energy (2016)
Figure A: Japan: LNG Import Prices 2006-2016
Producers on the hook
Gas producers are limited in their responses to falling
prices by the fact that large increases to supplyare planed
over the next four to ve years: far larger than global
markets are likely to be able to absorb. From 2016 to
2020, nearly 16 bn cfd of new LNG capacity is expected
to come on-stream, representing an increase of about
45% over the volume of global LNG trade in 2015 [2].
One response is bound to be the postponement, can-
cellation or reduction in size of several projects. Some
companies have indeed already announced plans to
modify their plans including projects in the US, Canada,
and Russia. High-co st LNG production, for e xample, in
the Arctic, Australia, and parts of Africa, is par ticularly
vulnerable, especially if low-cost producers, such as Rus-
sia and Qatar, decide to defend or increase their market
shares by competing on price. Another approach would
be to try and form a cartel of gas producers to rais e prices
by restricting production, an idea that has been oated
overanumberofyears,butabattleformarketshare
looks to be a more likely option at present.
References
1. e Institute of Energy Economics, Japan. Economic
and Energy Outlook of Japan through FY2017;
https://eneken.ieej.or.jp/data/6852.pdf.
2. Focus: LNG exporters face a future of low prices,
weak demand and too much gas. Oil and Energy
Tre nd s 2016; 41:4; pp 3– 6, DOI: 10.1111/oet.12362.
© 2016 John Wiley& Sons Ltd
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