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A Super-cool Idea

The attempt by India and four other Asian countries to form a club of LNG buyers is praiseworthy. But it faces multiple challenges.
Anilesh S. Mahajan        Print Edition: Jan 5, 2014
A Super-cool Idea

In the first week of December, executives from the energy industry of five Asian countries including India met in New Delhi. The purpose was to discuss ways to form a group of buyers that would help them strike better deals while importing liquefied natural gas (LNG). The meeting was significant given that these five countries - Japan, China, South Korea and Taiwan being the other four - collectively purchase nearly 70 per cent of the world's LNG, according to the BP Statistical Review of World Energy 2012 report. This was the second meeting to discuss the formation of a buyers' group, the first having been held in December 2012 in Beijing. But will such a grouping work?

"This is a forum exclusively for buying countries so that we collectively have a voice in the international market and can effectively negotiate [LNG import] deals," said B.C. Tripathi, Chairman and Managing Director, GAIL (India), at a media briefing on December 3, the first day of the two-day Asian Gas Partnership Summit. Tripathi added that while discussions were ongoing at the industry level, governments of the LNG importing countries should also talk among themselves for a gas buyers' club.


This is not the first time some countries are considering forming an association in the energy sector. Crude-oil producers have formed the Organization of Petroleum Exporting Countries. To counter OPEC's influence, Western nations formed the International Energy Agency after the oil shock of the 1970s that sent prices sharply upwards. Then there is the Gas Exporting Countries Forum, a group of 13 nations including Russia and Qatar, among the world's biggest LNG exporters.

The formation of an import group could give greater bargaining power to these five Asian countries. Currently, these countries purchase LNG at a high cost. Spot prices for the super-cooled gas, for instance, are close to $19 per million metric British thermal units (mmBtu), according to Reuters. Prices have risen by nearly a third from $14.13 in May because of high demand. India pays $14 to $19 per mmBtu while Japan pays $11 to $15. In comparison, prices of natural gas at Henry Hub in the United States are hovering between $3 and $5 per mmBtu, thanks largely to a boom in production of shale gas in recent years. Asian countries want spot prices of LNG to be linked to Henry Hub prices, though critics argue that this would make several under-construction LNG projects unviable. "Some recent deals have indicated the prices offered by the same seller to Europe and Asia vary greatly," Oil Minister Veerapa Moily said on December 2, backing the proposed club of Asian buyers. "This is largely because of the demand."

It will not be easy, however, for Asian countries to form a grouping of LNG importers. Many energy industry experts suggest it would be much easier for these countries to become partners in developing new LNG supplies. The formation of a buyers' club depends on a number of challenging factors. LNG contracts are mostly for the long term and it will be difficult to renegotiate existing contracts. Since most LNG is transported through tankers, the buyers will also have to manage logistics and negotiate harder with shipping companies. Demand and supply needs would have to be monitored closely since these countries do not have cross-country pipeline networks that connect with each other.

Moreover, demand and supply can fluctuate widely in coming years. There are talks in Japan and South Korea on returning to nuclear power. Japan is also pushing to create a futures market for gas. This would make things more complicated for other countries. Also, the US is gearing up to start exporting gas while China is aggressively pursuing shale gas exploration - it is believed China has more share gas reserves than the US. "It would make more sense for China to explore shale gas, which they are doing," H. Rashed Haq, Vice President at US-based advisory firm Sapient Global Markets, said at the New Delhi conference. "There is enough steam coal available in the international market at much competitive prices. This would reduce their requirement for gas, especially imported gas."

It will also be difficult for the Asian buyers to reach a common ground on LNG pricing, says the business head of a company that supplies LNG. The executive, who does not want to be named, says these countries have "dissimilar energy needs" and will find it difficult to present an effective united front to sellers.

Industry observers say that the price of gas worldwide is determined depending on the source of energy it replaces. In Japan and Korea, for instance, LNG replaces crude oil to produce electricity while in China it is replacing coal. In India, LNG is used for both industrial and power generation purposes.

Even if the five Asian buyers manage to form a group, its survival will depend on LNG supplies exceeding demand. This may happen when the US starts gas exports and supplies from East and West Africa begin. Many industry observers expect supply to turn surplus by 2017.

Consultancy FACTS Global Energy says new deliveries are needed from the US, Canada and Mozambique for supply to exceed demand. But if supply exceeds demand and prices drop, many upcoming LNG export terminals will become unviable as their finances are based on expectations of higher prices.

Sapient's Haq, however, believes most suppliers expect prices at Henry Hub to start rising once ships loaded with LNG start leaving US ports. That will make things complicated for India and other Asian buyers.

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