LNG Sellers to Chase Japan, South Korea on China-Russia Gas Deal

May 23, 2014 1:13 am ET

May 23 (Bloomberg) -- Liquefied natural gas sellers may face more competitive markets in Japan and South Korea, which together bought more than half of the world’s supply in 2013, after China signed a mega gas deal with Russia.

“A lot of the suppliers have to be more competitive and scramble to find more demand,” Fereidun Fesharaki, chairman of industry consultant Facts Global Energy, said in a phone interview yesterday. “In Japan, the only real opportunity is replacing expired contracts like those from Abu Dhabi or Qatar, but that will not emerge until late this decade or early next decade.”

China National Petroleum Corp. will buy 38 billion cubic meters of piped gas annually over 30 years from OAO Gazprom’s fields in eastern Siberia at a cost of about $400 billion in an agreement concluded May 21 after 10 years of talks.

This supply is equivalent to about 28 million metric tons of LNG, and combined with Sinopec’s purchase of LNG from Petronas’ Canada project, it means 33 million tons of demand has been “taken off the market,” Fesharaki said.

China purchased 18.6 million tons as the world’s third largest buyer of LNG in 2013, according to the International Group of LNG Importers.

“In South Korea, a lot of the end-users want to buy their own LNG and not go through Korea Gas Corp., so there may not be room for a lot of of long-term contracts,” according to Fesharaki. “Japan’s LNG demand will peak at about 91 million tons, with contract volumes of 25 million tons up for renewal.”

LNG sellers will have to be less picky and amend their contract formulas as buyers have more options, said Milo Sjardin, an analyst from Bloomberg New Energy Finance.

“If you want to sign a long-term contract today, the price is in the 13.5 percent oil-link range and it may move down to 13 percent,” said Fesharaki. “I think the oil-link has already moved down from the 14.5 percent level that was seen in the past.”

Prices for long-term LNG contracts, generally more than 10 years, are typically linked to the cost of Brent crude or the so-called Japan Crude Cocktail.