Diversify sources of gas, consumers told

Liquefied natural gas (LNG) consumers should pursue an active diversification strategy for LNG procurement. This was said by a panel on the security and diversity of gas supply at the inaugural Gas Asia Summit, held during SIEW.

Responding to a question from the floor, the panellists concluded that there are risks involved for Asia-Pacific LNG consumers who want to procure the bulk of LNG supplies based on Henry Hub prices, instead of going the traditional route and procuring oil-indexed LNG supplies.  

Alistair Smith, the Head of Origination, Asia & Middle East, for BP's LNG trading book, said consumers who want to procure Henry Hub-priced LNG would be betting on having LNG prices in Asia set by Brent crude prices, and for Brent crude prices to remain high in the long term.  This would be risky for the consumer, he noted, as he lauded the diversification strategy pursued by Japan post-Fukushima. For Japan, approximately 10 to 15 percent of LNG supply is being purchased using Henry Hub prices on short-term, flexible basis contracts. The rest of its LNG supplies are procured via oil-indexed long-term LNG contracts.

Due to the high infrastructure cost required to develop LNG projects, LNG supplies would likely continue to be procured via long-term contracts rather than through spot agreements. Total's Head of LNG supply, Guy Broggi, explained that there are not many suppliers who would be willing to take on the risks of developing costly LNG projects even before finding potential buyers.  

While the shutdown of nuclear power plants in Japan after the Fukushima Daiichi accident increased the demand for natural gas, demand has been easily met by the traditional natural gas suppliers. Smith elaborated that the increase in demand for LNG by Japan is being met by the LNG supplies that are initially intended for Europe, where an economic downturn is playing out.  Europe had been utilising more coal imported from the US, which has ironically started exporting more coal due to low domestic coal demand resulting from low Henry Hub natural gas prices during the same period.

By :Sandra Tan, EMA