TOKYO Global liquefied natural gas (LNG) projects must control their costs to be profitable at current LNG prices to compete against coal and renewable power, the president of the world's biggest buyer of the fuel told Reuters.
Projects should be profitable below $10 per million British thermal units (mmBtu) or the assumption that emerging market demand for LNG will rise could be called into question, said JERA Co President Yuji Kakimi in an interview on Friday drawing from remarks he will give on Wednesday to the CERAWeek conference in Houston.
"It is a must to have the industry that can sustain itself at current LNG prices," Kakimi said. JERA is joint venture of Chubu Electric Power (9502.T) and Tokyo Electric Power (9501.T)
"Last year's spot prices ranged from around $5 to $10 per mmBtu, and we have to have projects that are economical even at the low end of those prices."
"Otherwise the expected golden age of LNG in the mid 2020s may not come because it is questionable whether developing and emerging nations would significantly increase LNG purchases if the price keeps rising," Kakimi said.
Companies struggled to move towards final investment decisions (FID) last year as lower LNG prices combined with rising costs in addressing environmental concerns put a question mark on project viability.
Costs for the Gorgon project in Australia that started up in March last year were initially pegged at $37 billion and then ballooned to $54 billion. The Ichthys project slated to begin in the third quarter has experienced a 10 percent rise in costs since FID in January 2012.
Natural gas prices have traditionally been higher in Asia because of the lack of a pipeline network so gas has to be liquefied for transport on ships.
Producers have typically insisted on long term contracts for expensive projects to convince banks to fund them, along with a link to oil prices.
While LNG prices surged in the aftermath of Japan's Fukushima disaster in 2011, which led to the shutdown of most of the country's nuclear reactors, a two-year decline in oil prices has pushed the spot price of LNG in Asia down 70 percent from its 2014 highs LNG-AS.
JERA has led the way in pushing for changes in contracts that restrict the resale of LNG cargoes and the linkage to oil prices.
JERA received Japan's first LNG cargo derived from U.S. shale gas in January but paid nearly twice as much for fuel as its cheapest imports.
Paradoxically, Kakimi says that helped pushed down prices in Asia substantially, as sellers now offer a milder LNG price slope for oil-linked contracts. A milder slope, used to calculate the link between oil and LNG prices, puts a cap on the impact of higher oil to LNG prices.
"Conscious of U.S. LNG, the sellers of oil-linked LNG have lowered the slope to crude prices to court customers," he said.
"We have achieved big success in significantly lowering Asian LNG prices," he said. "When oil prices rise, will LNG become more expensive? I don't think such an age will return."
(Editing by Aaron Sheldrick and Christian Schmollinger)