LNG Sellers Retain Leverage Despite Joint Purchase Pressure

BMI View: Chubu Electric and GAIL India's MoU for joint LNG procurement could pave the way for similar deals to follow among Asia's LNG buyers. This has the potential of creating a dominant buyer in the LNG market. However, we maintain that the advantage in LNG price negotiations will still remain on the side of sellers, as most Asian buyers have to obtain these supplies or risk a power shortage in their home countries.

Asian buyers of liquefied natural gas (LNG) have advanced moves to jointly procure supplies in a bid to put downward pressure on prices. Japan's Chubu Electric and GAIL India signed a Memorandum of Understanding (MoU) for this purpose on March 21 2014, building on a preliminary agreement reached between the two companies in January. In addition, South Korea's Kogas has been in talks for a similar arrangement with undisclosed Japanese firms. Further joint procurement of LNG supplies by Asian buyers could effectively form a cartel that could bear significant pressure on LNG prices.

Asia has the world's largest demand for LNG, with Japan and South Korea holding the position of the world's first and second largest LNG markets respectively in 2013. The region has a 55% share of total contracted LNG volumes in 2014, and this is a share that is set to grow to 68% by 2023 according to LNG sales and purchase agreements (SPA) signed in the market to date.

LNG Purchases: An Asian Play
Global Distribution Of Contracted LNG Volumes, 2014 vs. 2023

LNG Sellers Retain Leverage Despite Joint Purchase Pressure

BMI View: Chubu Electric and GAIL India's MoU for joint LNG procurement could pave the way for similar deals to follow among Asia's LNG buyers. This has the potential of creating a dominant buyer in the LNG market. However, we maintain that the advantage in LNG price negotiations will still remain on the side of sellers, as most Asian buyers have to obtain these supplies or risk a power shortage in their home countries.

Asian buyers of liquefied natural gas (LNG) have advanced moves to jointly procure supplies in a bid to put downward pressure on prices. Japan's Chubu Electric and GAIL India signed a Memorandum of Understanding (MoU) for this purpose on March 21 2014, building on a preliminary agreement reached between the two companies in January. In addition, South Korea's Kogas has been in talks for a similar arrangement with undisclosed Japanese firms. Further joint procurement of LNG supplies by Asian buyers could effectively form a cartel that could bear significant pressure on LNG prices.

Asia has the world's largest demand for LNG, with Japan and South Korea holding the position of the world's first and second largest LNG markets respectively in 2013. The region has a 55% share of total contracted LNG volumes in 2014, and this is a share that is set to grow to 68% by 2023 according to LNG sales and purchase agreements (SPA) signed in the market to date.

LNG Purchases: An Asian Play
Global Distribution Of Contracted LNG Volumes, 2014 vs. 2023

Breaking down further, in 2014 Japan will dominate the long-term LNG sales market with a 40% share in Asia, followed by South Korea with 28% and China with 14%. Japan and South Korea will still lead Asia's long-term LNG sales by 2023, though China and India will see their share of the long-term market increase as gas demand in these countries continue to outpace domestic gas supply growth.

China And India Play Catch-Up
Distribution Of Contracted LNG Volumes In Asia, 2014 vs. 2023

The Making Of A Giant

Unlike Chubu Electric, who will take up 4.8% of the world's total long-term contracted LNG supplies in 2014, GAIL India is currently a marginal player that will make up for less than 1% of the global long-term LNG market in the same year. However, there is much potential for GAIL's long-term LNG demand to grow. Most of India's LNG demand is currently purchased on the spot market but the country's gas players are looking to secure more long-term supply contract to meet its needs.

As we do not expect India to have any pipeline import capacity by 2023, its gas import requirement - which we forecast at 42.2bcm - will have to be fulfilled by LNG imports. However, at present India has only secured 19mn tonnes per annum (25.8bcm) of LNG for 2023 through long-term supply deals. Unless it meets its remaining demand needs through spot purchases, Indian gas players could sign as much as 12mn tpa (16.4bcm) in further long-term SPAs. This includes state-owned GAIL India, who has been leading the country in procuring long-term LNG supplies.

Room For GAIL To Increase Contracted LNG Volumes
India - Total Net Gas Import Requirement & Contracted LNG Volumes (bcm)

Assuming that GAIL India signs on to further long-term SPAs that amount to at least 6mn tpa (8.2bcm) in contracted LNG supplies, this could boost total demand from both Chubu Electric and GAIL for contracted supplies to 28.5mn tpa (38.8bcm) in 2023 - or nearly 6% of total contracted supplies in the global LNG market. Moreover, given that Chubu has not taken on new contracts beyond 2018 while 5.5mn tpa in supplies would have expired between 2016 and 2021, there is scope for Chubu to take on more contracted volumes in the coming years.

Together We're Better
Total Possible Contracted Volumes Of Chubu Electric & GAIL India (mn tpa)

It Pays To Chill Together

While the Chubu-GAIL combination may still not be large enough to create a dominant buyer in the LNG market, further deals could follow that may. A Japanese team-up with Kogas, for example, could create a significant single buyer in the market. Kogas alone already accounts for 13.6% of total contracted LNG supplies in the world in 2014. Depending on the Japanese firm it enters into a joint procurement deal with, combined share of Kogas and its Japanese partners' contracted LNG purchase could make up 14.4% to nearly 20% of the world's total LNG contracted volumes in 2014.

When The Powers Combine
Total Possible LNG Procurement Volumes Between Kogas And Selected Japanese Buyer (mn tpa)

Another buyer combination that could put price pressure on LNG sellers is the teaming up of all Japanese LNG buyers as together Japanese they make up 29% of total global contracted LNG volumes both in 2014 and 2023. Indeed, Japan's largest utility TEPCO is studying the prospect of jointly procuring LNG supplies with other utilities, as part of its turnaround plan to return the beleaguered firm to profitability ( see 'Joining Forces To Push Prices Down', January 17).

The Japanese Effect
Japan's Share Of Global Contracted LNG Volumes (mn tpa)

Tight Supplies To Limit Effectiveness

While a dominant buyer could certainly emerge in the LNG market from these developments, we continue to note that in the short- to medium-term LNG sellers will still hold an advantage in price negotiations. Unlike buyers, sellers - particularly those who have yet to commit to an export development - face less urgency in bringing LNG export projects online than buyers are in procuring supplies.

While buyers - many of which are either utilities or state-owned firms meeting the country's power needs - will most likely have to import gas regardless of prices or face the prospect of power shortages, private developers of LNG projects in particular can choose to stall developments to direct capital to more profitable ventures. The risk of this has increased given rising pressures on the oil and gas industry to cut capital expenditure (capex) as production costs soar and oil prices look to be on the downtrend. Meanwhile, countries where LNG developments are state-led (such as Qatar and Russia) appear to be stepping up efforts to cooperate on prices, in a bid to counter the pressure buyers are putting up ( see 'LNG Exporters Fight Back In Pricing War', October 29 2013).

We maintain that an abundant supply of US LNG in the global market holds the key for any meaningful decrease in prices to be seen. Given the discount at which US gas prices are trading relative to other regional gas markets, US LNG producers will be more likely than other sellers to agree to Asia's lower price demands.

US Supplies: Still Too Few To Make A Bigger Dent
US Share Of Global LNG Supplies, 2013-2022 (bcm)

At present, we forecast that the US will only account for about 16% of total LNG supply by 2022; at this volume, it is more likely for US LNG prices to converge upwards to that in other regional markets as demand for US LNG rises more than exports can keep up. However, we do acknowledge that the spectre of a gas crunch in Europe owing to Russia's perceived belligerence in Ukraine could speed up the US government's approval of LNG export projects. This poses a risk to our view that the advantage in price negotiations will remain with the sellers.

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