SINGAPORE: Some of the world’s biggest importers of liquefied natural gas (LNG) are reducing orders in the face of a 500 per cent price surge within a year, raising concerns among major producers about potential long-term destruction of demand.
LNG buyers, including numerous emerging economies in Asia, are baulking at prices that have doubled just within the past month, while a growing number of exporters in North America are straining to boost export capacity that will still take years to come online, report agencies.
But the surge in natural gas prices is prompting power providers to revert to coal and fuel oil and causing a rethink on new LNG investments in Southeast Asia, which was expected to be the heart of LNG demand growth.
Within Asia, which accounts for 70 per cent of global LNG imports, a majority of long-term contracts are oil-linked. But South Asian countries such as India, Pakistan and Bangladesh - which together account for 20 per cent of Asia’s imports - have a much higher exposure to spot LNG prices, which are currently at a record high of over US$50 per million British thermal units (mmBtu).
That’s raised alarm among developers in Southeast Asia, as analysts say plans for new LNG regasification terminals may now be delayed given the high LNG prices and after government budgets were stretched by costly COVID-19 outbreaks, a source familiar with contract negotiations said.
“New buyers are under a lot of pressure to justify signing contracts at these prices, so they have been slow to progress discussions,” said the source, who has noted a sharp fall in enthusiasm among potential buyers to even discuss LNG projects compared to a year ago. He declined to provide more details or be named due to the sensitive nature of the deals.
For big US export terminal operators, rising prices were initially welcome. However, the volatility in costs makes it harder to sign additional long-term contracts and is a source of frustration, as they know that they will only be able to add incremental export capacity in the next year.
Feygin however said Cheniere would soon decide on an additional expansion at its Corpus Christi LNG export plant in Texas, noting that global prices, when compared with lower US prices, are a tailwind for the company.
U.S. benchmark gas prices are currently at seven-year highs, but at US$6 per million British thermal units, 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 - about 10 per cent of the gas it pulls out of 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 Cheniere’s Sabine Pass and Venture Global LNG’s Calcasieu Pass in Louisiana are expected to start producing LNG in test mode. After that, the world may have to wait even longer for additional U.S. or Canadian projects. Houston-based Tellurian Inc, which announced three long-term deals 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 go into service until around 2025. In addition, numerous proposed projects were scuttled between 2019 and 2020 due to persistently low prices.