The LNG affair

Global fact 1: Oil-linked Asian Liquefied Natural Gas (LNG) price stands at $6.63 per mmBtu. Global fact 2: The ICIS East Asia Index for March 2015 settled at $6.85 per mmBtu. Global fact 3: With Brent crude at $45.73 per barrel, Asian power producers are switching away from LNG to fuel oil for power generation (because it is now cheaper to produce power with fuel oil). Analysts’ consensus: Asian LNG prices are expected to fall by up to 30 percent in 2015.
Pakistan fact 1: The government is in a rush to bind 188 million Pakistanis into a long-term LNG contract exactly when global prices are falling like ninepins. Pakistan fact 2: The government is bent upon forcing Pakistani power producers to switch to LNG.
According to Reuters, “Global gas prices are seeing their biggest drop on record as slowing Asian demand, new supply from mega-projects and a streak of abnormally mild temperatures worldwide mark the end of a five-year bull run.”
As far as demand is concerned, Asia is LNG’s largest market. Japan, South Korea and Taiwan collectively buy around two-thirds of global LNG traded. Japan, the world’s largest LNG buyer, has switched from LNG to its nuclear power plants. Demand in South Korea is sharply down because of a slowing economy, high LNG stocks and moderate temperatures. Taiwan’s LNG imports are down because of lower demand from the power sector.
As far as future supply is concerned, Australia has more than $180 billion worth of LNG export projects under construction. This year, six new liquefaction plants in Australia, the US and Indonesia will expand global supply by a wholesome 10 percent. In Canada, four new LNG export projects will add 7 billion cubic feet per day. Between now and 2020, 25 more countries are planning to inject an additional 30 percent to the existing global LNG capacity. In effect, between now and 2023, production capacity is going to be far in excess of demand.
Our government is negotiating – rather secretively – in a scenario where global supply is increasing and global demand is decreasing. LNG is now a buyer’s market whereby sellers are desperate to sell and buyers can lock-in rock-bottom prices. The cheapest LNG cargoes landing in China have been Australian and Indonesian LNG cargoes with an average price of $3 per mmBtu to $4 per mmBtu.
There are at least 19 major exporting countries including Qatar, Malaysia, Indonesia, Algeria, Nigeria, Australia, Russia, Oman, and the UAE. On February 4, the ICIS East Asia Index for March 2015 settled at $6.85 per mmBtu. Just imagine that on the same date last year the index had settled at $19.84 per mmBtu. On February 4, the ICIS Japan front-month spot price stood at $6.875 per mmBtu.
Question 1: Why are we switching to LNG when major Asian power producers are switching away from LNG? Question 2: How can we stay competitive with LNG that costs us up to $12 per mmBtu or more when the world is buying the same at around $6 per mmBtu? Question 3: Why is our government negotiating secretively? Question 4: What about the Right to Information Act, 2013? Question 5: Why are we negotiating with just one LNG supplier? Question 6: What about PPRA rules?
The writer is a columnist based in Islamabad.
Email: farrukh15@hotmail.com. Twitter: @saleemfarrukh