One obvious answer to the question of who will sign is: “Not China”. It has baulked at the price demand by Chevron and its partners in Australia’s Gorgon development, and is even showing signs of walking away (for a while) from LNG as a future fuel.
Japan, perhaps being more attuned to paying market prices and then passing on the cost to customers, has been more willing to pay the market price for LNG.
But, a variation on the question of LNG and price is that ultra long-term contracts, of the sort needed to satisfy the bankers to LNG projects, are being questioned by customers largely because right now is a dreadful time to make such long-term commitments.
The question is, will prices continue to rise or have oil and gas prices peaked?
Powerful forces at work in global LNG will play a key role in deciding whether Gorgon gets a green light in the middle of next year, whether Woodside can develop its stand-alone Pluto project, and whether BHP Billiton can proceed with its Scarborough development.
The most obvious force is the price of oil – and allied to that the price being won for spot-market cargoes of LNG.
But the sales pitch of LNG being a more environmentally acceptable fuel is enhanced by its long-term availability compared with the issues which surround the oil market.
Lately a series of production problems at LNG projects around the world has pushed the price of spot material through the roof. Last month, there were reports of short-term gas prices soaring to more than double the current price of long-term LNG sales.
Over the past few weeks the situation has got worse with a global LNG shortage causing ships to be diverted to Spain to fill emergency shortfalls in supply.
Big LNG supplier, Qatargas, is reported to be having trouble with one of its production trains. Trinidad’s Atlantic LNG plant has missed several shipments to the US, and a derailment of train four at Australia’s North West Shelf project took 38 days to repair.
These shortages mean high spot market prices, and spot market prices have a natural tendency to drift into long-term contracts. But people considering long-term contracts also want to be sure that supply will be reliable.
Which leads back to our start-up question: “Who would sign a 25-year contract at peak prices?”
Promoters of gas projects, especially the chaps running the Australian developments, reckon that now is a terrific time to be a seller.
It’s a different view from the buyer’s side of the equation and China is definitely losing its interest in LNG as shown in way it walked from Gorgon, and reports from Hong Kong that China is close to abandoning its target of lifting LNG to 8% of its energy mix by 2010 – solely because the stuff has become too expensive.
The Chinese view of the world is that coal, while nasty and smelly and a prime cause of greenhouse gas and other pollution, is a global problem – not just one for the Chinese.
There is also a view that western suppliers of everything from iron ore to LNG see China as an easy target for a bit of ripping off. This is something causing real anger in Beijing as shown in its furious reaction to this year’s 71.5% hike in iron ore prices, and now its re-thinking the use of LNG.
Another factor which The Slug reckons is at work here is a belief in China that commodity prices have peaked. In the metals market, China is arguing that copper prices are due to fall. It is also talking down iron ore prices – so why not oil, and why not LNG?
Why not, indeed!
