Gas pains upend market price dynamics in Asia
India’s largest LNG importer close to long term deal at spot not future price as producers lose bargaining power amid a supply glut
Developments in Asia’s liquified natural gas (LNG) markets could change the way the fuel is priced for long term deals, putting more pressure on already distressed producers scrambling to cover costs while offering new opportunities for deal-seeking buyers.
New Delhi-based Petronet LNG, India’s largest LNG importer, said on Tuesday (June 30) that it was close to striking a 1 million ton per annum (mtpa) procurement deal for the super-cooled fuel at a price near spot or daily rates. If consummated, the long-term deal would be unprecedented in its pricing.
“We are very close to a long-term deal on the daily benchmark,” Petronet LNG CEO and Managing Director Prabhat Singh told a news conference.
Singh refused to give details of the supplier but said the company aimed to further increase its capacity depending on the customer’s response. He added that nearly 13 LNG producers have recently shown interest in supplying fuel to the country.
Shefali Shokeen, a New Delhi-based LNG analyst, told Asia Times that even though Petronet hasn’t yet disclosed the tender price details, the company did issue a Request for Information document in February and were looking for LNG sellers to supply the fuel from 2024 for a ten-year period.
It was mentioned that the cargoes will be bought on a price linked to both Henry Hub futures and Dutch Title Transfer Facility (TTF),” she added.
The Henry Hub pipeline in Louisiana is the pricing point for natural gas futures on the New York Mercantile Exchange (NYMEX). The settlement prices at Henry Hub are used as benchmarks for the entire North American natural gas market and parts of the LNG market.
The TTF is a virtual trading point for natural gas in the Netherlands, and is becoming Europe’s main benchmark for long-term contract pricing and for LNG imports.
So far this year, India has bought LNG under long-term contracts from both Australia and Qatar – the world’s top two LNG exporters – at an average price of US$3.5-US$4.5 per million British thermal units (MMBtu). Indian companies have also bought several cargoes on the Asian LNG spot market.
Petronet’s disclosure comes as India is going long on LNG infrastructure build-out to make up for its inability to meet domestic gas demands, and as New Delhi earmarks gas to make up a larger percentage of the country’s overall energy mix.
India is currently the world’s fourth-largest LNG importer after Japan, China, and South Korea, respectively. Taiwan is the world’s fifth-largest LNG importer.
Natural gas constitutes a relatively small share (6%) of India’s total primary energy consumption, but in 2019 the government set a goal to increase that share to 15% by 2030.
New Delhi is also turning to more gas usage to help reduce its carbon footprint, reportedly the third-highest after the US and China. Most of India’s growth in gas consumption will be in the industrial and power generation sectors over the long-term.
India commissioned its sixth LNG import terminal earlier this year, bringing its total regasification capacity to 5.2 billion cubic feet per day (Bcf/d). Four more LNG import terminals, all but one of which are on the western coast, are currently under construction and are expected to come online by 2023.
They will add some 2.5 Bcf/d of LNG import capacity, according to a US Energy Information Administration (EIA) report in May.
Petronet’s Dahej terminal in a file photo.
However, the most important take-away from Petronet’s disclosure on Tuesday isn’t just its impact on LNG developments in India, but rather how the pricing of long-term contracts based on spot or daily prices could impact the entire LNG sector, especially in a prolonged period of record low prices.
The possibility of more mid- or long-term supply deals being pegged to daily or spot prices will likely send many producers scrambling for cover. Lower cost producers like Qatar, a major Indian LNG supplier, will be able to navigate these new market and pricing developments better than higher-cost producers like the US, Russia, and Australia, to name a few.
Moreover, most of Qatar’s supply deals are already locked into long-term oil-indexed prices. Projects in the planning stages or about to be sanctioned in other countries are more exposed, while additional project proposal cancellations will ensue given the prevailing dynamics in LNG markets.
Contractual long-term LNG prices in the Asia-Pacific region, home to nearly two-thirds of global LNG demand, have historically been linked to crude oil benchmarks, namely Brent crude.
One popular and early formulation is the indexing of LNG contracts to the Japan Crude Cocktail (JCC) price. JCC represents the average price of crude oil imported to Japan and reported by Japanese customs.
JCC indexation is still the most common way LNG contracts in Japan and other legacy buyers in the region, including South Korea and Taiwan, are priced. Most long-term contracts out of Malaysia, Australia and Indonesia have largely been based on the JCC index.
LNG producers wanted the security of long-term contracts based on oil prices to help fund new capex intensive production projects.
However, over the last few years due to a glut of the fuel mostly from production ramp-ups in Australia and the US, expensive oil pricing indexes and longer-term contracts have been called into question, renegotiated and even abandoned.
LNG spot prices in Asia, for their part, have hit prices well beneath most producers’ break-even points this year, adding incentive to other market participants looking to take advantage of the rock bottom prices.
LNG exporters like Qatar are currently much better positioned than the US to satisfy Europe’s natural gas demand. Photo: iStock
LNG exporters like Qatar are better positioned than others to survive a low-price environment. Photo: iStock
Japan Korea Marker (JKM) prices, a popular benchmark for the fuel in the region, crashed below the $2 per million British thermal units (MMBtu) price point earlier this year. Prices are still hovering just above that price.
Henry Hub and TTF gas prices have also tanked this year. Two weeks ago, Henry Hub plunged to its lowest level in 21 years at US$1.38/MMBtu, according to the EIA. Since then, it has moved upward but is still fetching around a dismal $1.7/MMBtu. TTF prices are also currently trading at around $1.71/MMBtu.
The three major gas pricing points, meanwhile, are unlikely to rebound substantially before winter commences in the Northern Hemisphere.
Even as colder temperatures ensue, with increased gas demand needed for heating, the ongoing oversupply scenario and the likelihood that the Covid-19 pandemic will still be lingering in major population centers prices, will cause prices to struggle to find a floor.
As such, Asian spot LNG will likely reach around $3/MMBtu toward year’s end and could trend marginally higher after the new year sets in.
Global commodities data provider S&P Global Platts sees JKM-LNG derivatives as pricing in a stronger market for the autumn months, with September and October swaps settling on June 24 at $2.63/MMBtu and $3.03/MMBtu, respectively. That’s by any measure still quote bearish for LNG spot market prices.