E&Y: New LNG exporters could change pricing status quo

A broadening of the LNG supply base will support anticipated demand growth in the next 10-20 years, although pricing scenarios are likely to change with more price-sensitive buyers becoming less willing to pay supply security premiums, according to a recent report by Ernst & Young.

Algeria, Malaysia, and Indonesia were the first to dominate world LNG supply and then were joined by Qatar and Australia, said the E&Y report entitled “Global LNG: Will new demand and new supply mean new pricing.”

E&Y said, “The third wave could come from as many as 25 other countries, many of which currently have little or no capacity; but by 2020, these countries could provide as much as 30% of the world’s LNG capacity.”

Analysts believe diverse new supply sources will change the LNG status quo with Asian buyers presumably looking to modify or possibly replace their long-standing and relatively expensive pricing model of gas prices tied explicitly to oil prices.

“High LNG development costs will require iron-clad, long-term, off-take agreements. However, more recently, the market is witnessing the inherent conflict of increasingly more-expensive projects trying to sell to increasingly more price-sensitive buyers,” the report said.

New potential LNG exporters, most important to the issue of pricing are those in the US and Western Canada, where the source gas is likely to be priced on a spot basis, unlike gas elsewhere in the world which is generally priced (wholly or partially) on an oil-linked basis, E&Y said.

“Critically, the possibility of spot gas-linked contracts for North American LNG could upset the traditional LNG pricing structure,” the report said. Proposed North American LNG export projects are particularly well-positioned for a cost advantage.

“As substantial volumes of lower-cost LNG move into Asian markets, projects at the high end of the supply curve—namely, many of the Australian projects—will become increasingly vulnerable,” E&Y said.

Going forward over the medium to long term, E&Y analysts expect to see a gradual but partial migration away from oil-linked pricing to more spot or hub-based pricing.

Contact Paula Dittrick at paulad@ogjonline.com.

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