* Large volume, long-term contracts now "more difficult"
* JERA, Total sign deal with flexible volumes, spot prices
* Woodside, Shell see big opportunity in small-scale LNG
By Osamu Tsukimori
CHIBA, Japan, April 5 Producers of liquefied
natural gas (LNG), having shot themselves in the foot with
oversupply, and facing calls for flexibility and greater
competition from other fuels are taking on more risk and
learning to trade, just like any other commodities dealers.
That's a big change for a market long dominated by large
producers such as Royal Dutch Shell and BP which
provide major importers with fixed volumes under multi-decade
contracts linked to the price of oil.
Under the protection of these lucrative locked-in deals,
producers in Australia, Qatar, Russia and elsewhere went on an
investment spree that resulted in a huge supply overhang when
demand in China and India developed more slowly than expected.
That, together with rising fuel competition from coal and
renewables, contributed to a more than 70 percent crash in spot
Asian LNG prices LNG-AS to under $6 per million British
thermal units (mmBtu), increasing the pressure to grant more
flexible contracts and better pricing options.
"The LNG market is changing rapidly, (and) the large volume
long-term contracts that traditionally underpinned the
development of the industry are today much more difficult to
obtain," said Steve Hill, executive vice president of Shell
Eastern Trading, during a gas conference in Japan on Wednesday.
"LNG projects ... need to take more market risks," he said.
In a sign of what might be ahead, Japan's JERA - the biggest
single importer of LNG - and France's Total have
signed a deal with flexible volumes, based entirely on spot
prices, according to sources close to the matter.
Neither Total nor JERA responded to queries for comment.
Another thing about to change is that trading specialists -
who buy commodities from producers to sell on to importers at a
profit and who have so far played a smaller role in LNG than
they do in oil or coal - are jumping into the game.
"People need to sit in the middle of the chain (to) provide
the flexibility and meet the different customer needs," said
Mike Utsler, chief operations officers for Australia's Woodside
Preparing to do just that, commodity merchant Trafigura
this week launched a standard master sales and
purchase agreement (MSPA) for LNG trade, something already well
established in other commodities.
UNLOCKING NEW MARKETS
Woodside, which operates several large LNG export facilities
and is developing more, said producers also had to create new
markets amid oversupply.
"There's a big opportunity for much smaller scale demand ...
Big, long-term contracts are not necessary in order to supply
(such projects)," Utsler said.
The thinking is similar at Shell. "We are trying to unlock
new gas markets ... by initiating new small-scale LNG import
terminals," Hill said.
Smaller scale demand could come from new importers like
Pakistan, which only started using LNG in the last two years, or
from new sectors like transportation.
Singapore's Pavilion Energy this week signed a memorandum of
understanding with Total SA to supply the French
energy major with LNG used as a ship fuel.
But LNG producers need to mind competition. Oil still
dominates transportation, and cheap coal - seen by many as
outdated due to high pollution levels - is still the biggest
fuel source for electricity, especially in fast-growing Asia.
Wind and solar energy are also becoming competitive.
"Coal won't completely disappear. It will continue to be a
competitor and a provider of energy solutions, as will
renewables," said David Knipe, head of international gas at BP's
integrated supply and trading unit.
(Reporting by Osamu Tsukimori; Writing by Henning Gloystein;
Editing by Tom Hogue)