Record gas prices slow LNG investment in Asia; North America jostles on exports

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By Jessica Jaganathan, Scott DiSavino and Brijesh Patel

SINGAPORE / NEW YORK / BENGALURU, Oct. 7 (Reuters) – Some of the world’s largest importers of liquefied natural gas (LNG) are slashing orders amid a 500% surge in prices in one year, raising concerns among major producers over to a long-term potential for demand destruction.

LNG buyers, including many emerging Asian economies, balk at prices that have doubled over the past month, as a growing number of North American exporters scramble to increase capacity to export which will take years to come online.

Natural gas is seen as a more acceptable fossil fuel as growing economies like India, China and Pakistan attempt to reduce carbon emissions because it burns cleaner than oil and coal. But soaring natural gas prices are prompting electricity providers to switch back to coal and fuel oil and rethink new LNG investments in Southeast Asia, which is expected to be at the heart of LNG demand growth. .

In Asia, which accounts for 70% of global LNG imports, the majority of long-term contracts are oil-related. But South Asian countries such as India, Pakistan and Bangladesh – which together account for 20% of Asian imports – are much more exposed to spot LNG prices, which are currently at a record high of over $ 50. per million British thermal units (mmBtu).

This has alarmed developers in Southeast Asia, as analysts say plans for new LNG regasification terminals could now be delayed given high LNG prices and after government budgets were strained. by costly COVID-19 outbreaks, said a source familiar with contract negotiations.

“New buyers are under a lot of pressure to justify signing contracts at these prices, so they have been slow to move the talks forward,” said the source, who noted a sharp drop in enthusiasm among potential buyers for even discussing LNG projects compared to a year ago. He declined to provide further details or to be named due to the sensitive nature of the agreements.

For the major US export terminal operators, the price hike was initially welcome. However, cost volatility makes it more difficult to sign additional long-term contracts and is a source of frustration as they know they will only be able to add additional export capacity next year.

“We didn’t like the low, fixed prices all over the world of around $ 2 per mmBtu from a year ago, and I don’t know what I hate the most about the really high prices we are getting into. let’s find out now, ”said Anatol Feygin. , Commercial Director of Cheniere Energy Inc’s, the largest exporter of LNG in the United States. “It is a manifestation of the fact that the markets are not very good at investing throughout the cycle.”

Feygin said, however, that Cheniere would soon decide on further expansion of its Corpus Christi LNG export plant in Texas, noting that global prices, compared to lower US prices, are a positive wind for the company.

Benchmark US gas prices are currently at seven-year highs, but at $ 6 per million UK thermal units, they are far from Asian and European levels. The United States only has the capacity to turn about 10.5 billion cubic feet per day (bcfd) of gas into LNG, or about 10% of the gas it extracts from the ground.

Global markets will have to wait until later this year to get more from the United States, when the sixth liquefaction train at the Sabine de Cheniere Pass and Venture Global LNG’s Calcasieu Pass in Louisiana is expected to begin producing LNG in test mode.

After that, the world may have to wait even longer for other US or Canadian projects. Houston-based Tellurian Inc, which announced three long-term agreements over the summer to sell LNG to units of Royal Dutch Shell PLC, Vitol SA and Gunvor Group, is expected to start producing LNG in late 2025 at the earliest, said Charif Souki, Executive Chairman.

In British Columbia, LNG Canada is not expected to enter service until approximately 2025. In addition, many proposed projects were scuttled between 2019 and 2020 due to still low prices.

LACK OF INVESTMENT

New Asian LNG buyers are more affected by price volatility than established importers, who are able to mitigate the impact of higher spot prices by bundling these purchases with existing lower-cost oil-related deliveries, said Wood Mackenzie vice president Valery Chow.

“Rising import bills for LNG are straining national budgets and (Bangladesh and Pakistan) are actively seeking to move away from gas in favor of lower cost alternatives, such as fuel oil, for the production of gas. electricity, ”Chow said.

Bangladesh has reduced its LNG imports, with September’s total dropping 33% from the previous month, ship tracking data from Refinitiv Eikon showed. The country is also considering extending the leases of five fuel-fired power plants and potentially increasing fuel imports.

Pakistan has canceled and reissued tenders for LNG in the past two months and may consider relying on just futures imports in the future, an industry source said.

There are signs of eroding demand from established buyers in India and China. LNG imports to India fell 4.2% through September compared to the same period in 2020. In China, second-tier gas importers – mainly town gas companies – are reducing their spot purchases .

In South Korea, Asia’s third-largest importer, a buyer called the situation “chaos”.

“The current market situation is not healthy,” Qatari Energy Minister Saad al-Kaabi said on the sidelines of a virtual LNG conference in Japan. The country is the world’s largest supplier of LNG and has said it will increase production by around 40% to 110 million tonnes per year by 2026.

If LNG prices continue their recent rise, cost-conscious buyers may have no choice but to reduce demand.

“With winter … and no sign of LNG prices slipping, managing demand and ultimately rationing electricity may be a last resort,” said Chow of Wood Mackenzie.

(Reporting by Jessica Jaganathan, Scott DiSavino and Brijesh Patel; Editing by David Gaffen, Gavin Maguire and Raju Gopalakrishnan)


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