Price for liquefied natural gas under pressure from plummeting oil price
The plummeting price of oil is hurting the nascent onshore liquefied natural gas (LNG) industry, as well as wiping millions of dollars in value off the share price of companies.
The sector grew quickly but has been beset with cost over-runs and high construction and commissioning costs.
The first tanker of LNG sourced from coal seam gas only left Gladstone in Queensland this week.
Like all bulk commodity prices, the actual price received under off-take agreements, or simply contracts of sale, are shrouded in secrecy and ‘commercial in confidence’ provisions.
Spot prices can give an indication of general price trends and in the case of the gas from Australia to Asia, that is intrinsically linked to the price of oil.
Senior commodities analyst with ANZ Daniel Hynes says that is for historical reasons.
“Because gas markets have traditionally been landlocked it was difficult and costly to transport gas long distances,” he said.
“With the advent of seaborne LNG it was linked to the other seaborne energy source it replaced, oil.
“And although LNG is opening up gas markets to the rest of the world, the tradition of selling to Japan (the dominant customer) through oil-linked contracts remains.”
Japan has actively been trying to sever the historical linking of the the two prices as it was paying a higher price than some other countries for gas.
That’s unlikely to be pursued rigorously anytime soon, now the oil price plunged nine per cent in 48 hours to hit nearly six year lows.
“I think it’s unlikely in the short to medium term,” said Daniel Hynes.
“It was of greater importance when the oil price was high early in 2014, but I think with the current price they’re relatively happy for the time being.”
West Texas intermediate crude is currently $US47.86. Brent crude is $51.10.
Daniel Hynes said the lower price for gas will come about later than the oil price drop.
“The oil-linked gas price imported into Japan is based on a formula which looks like an ‘S’ curve and it does have a lag to the oil price
“So we haven’t yet seen gas prices fall to the level we’ve seen oil prices fall, although gas prices have been weak over the past month or two.
“Certainly as we get into 2015 we’re expecting to see gas prices fall from the $15 to $16 per million British thermal units (Mbtu) down to around the $10 to $11 level.
“That would correlate to a $60 to $70 per barrel oil price.”