LNG revenues at risk as pricing reviews loom

International

LNG revenues at risk as pricing reviews loom

Billions of dollars of Australian commodity export revenues are at risk over the next two years as LNG sales contracts come up for price review just as a slump in LNG spot prices has piled on pressure to cut contract tariffs, according to Credit Suisse’s head of energy research.

Saul Kavonic told the bank’s Australian Energy Conference on Thursday that some Japanese buyers locked into expensive long-term contracts are now paying twice as much for LNG as those buying from the spot market.

“We can see…that that divergence could persist for the next couple of years,” he said.

Building oversupply in the LNG market has also put pressure on the pricing formula typically used in Asian long-term contracts that links the price to crude oil.

That “slope”, which was as high as 15 per cent in legacy contracts with LNG importers in Japan, has slid and more recently has fallen into the 11-12 per cent range.

Mr Kavonic said that would add to the pressure to reduce LNG prices in contracts when they came up for review, particularly given the difficulties among Japanese buyers to pass on costs in their now more liberalised domestic market.

It’s a question of how much they are going to come down,” he said of the pricing in the contracts. “There are literally billions of dollars a year in foreign revenue for Australia and PNG which are at stake here.”

But LNG industry players speaking at the conference played down the likely impact of price reviews.

“Any change is going to be modest,” said Santos’ head of gas commercialisation Jane Norman, noting that contracts with LNG buyers stipulate the possible range of upward or downward movement that is possible in price revisions.

“It makes a great headline but that’s now how it plays out,” agreed Oil Search’s executive general manager, gas business development Ian Munro, while acknowledging the severe pressure on buyers at the moment, particularly in Japan.

He said each contract was bespoke and set out how much prices could be changed, with the conditions of the prevailing market being “irrelevant”.

https://www.afr.com/business/energy/gas/lng-revenues-at-risk-as-pricing-reviews-loom-20190619-p51zd0

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