02 December 2015, 23:53 / Business

LNG is rapidly becoming cheaper

The Asian LNG market has already ceased to be premium. This makes competition tougher Alina Fadeeva

Following oil, LNG is rapidly becoming cheaper / Koji Sasahara / AP

The global market for liquefied natural gas (LNG) has changed over the past year, said Frederic Barnot, executive director of Gazprom's trading subsidiary Gazprom Marketing & Trading, at the 16th annual LNG Congress (quotes from TASS). There are no longer buyers who offer large price premiums; the previously premium market in the Asia-Pacific region is no longer attractive to sellers, the top manager complained. Buyers are switching to short- and medium-term contracts, LNG prices are falling, new major players are appearing in the market, Barno explained the reasons.

Recently, several extremely pessimistic forecasts about LNG prices were published by Citi analysts. In 2016, the US will begin exporting LNG, additional volumes will come from plants in Australia, and the forecast for gas demand in Japan (the largest buyer) is not encouraging, as the country still plans to return to nuclear power. So LNG prices in both Europe and Asia will be low, analysts write. In Europe – at the level of $5 per 1 mmbtu (1 million British thermal units) during 2016–2017, and in Asia next year they will fall to $6–7 per 1 mmbtu. Japanese, Chinese and Korean buyers are already reselling long-term LNG supply contracts, bank analysts noted in another review cited by Bloomberg. In June 2014, on the eve of the fall in oil prices, LNG in Europe cost about $7.3 per 1 mmbtu, in the UK - about $6.7, and in Japan - $13.8 (see chart).

The share of LNG in global gas supplies will increase from 8% in 2013 to 23% in 2035, Cedigaz predicted in February. Demand will grow most strongly in Asia, according to the association - by 3.2% annually (including 6.1% in China); in Europe – by 0.6%. The average spot price in Japan will be $14.7 per 1 mmbtu, and in Europe – $12.5, but this is if Brent rises to $130 per barrel.

This year, LNG producers will ship 240 million tons of gas with a total capacity of 320 million tons, according to Alexey Grivach, deputy director of the National Security Fund. But the growing supply of LNG is changing the entire gas market. By 2020, and possibly earlier, new LNG capacity of approximately 180 billion cubic meters will appear on the market. m, says Sberbank CIB analyst Valery Nesterov. And in the near future, Japan and China, which have contracted too much gas, may begin re-exporting, he believes. This could provoke price wars: Gazprom will need to retain at least traditional markets and prevent the supply of American and Qatari cheap gas to Europe. The share of LNG is growing, the global gas market is forming and prices are falling, but to what level is an open question, the analyst explains. Pipeline gas from Russia is more competitive than European gas from any other source, even if the price of gas for European consumers, theoretically, drops to $100–120 per 1000 cubic meters. m ($2.8–3.2 per 1 mmbtu), Gazprom’s exports will not be unprofitable, Grivach points out.

There is only one operating LNG plant in Russia - at the Sakhalin-2 project being implemented under a PSA (Gazprom controls the project). In 2017, the first stage of Novatek-controlled Yamal LNG with a capacity of 16.5 million tons should start operating. The project is protected: firstly, most of the gas has been contracted, and secondly, its costs are among the lowest in the world, he says portfolio manager of GL Financial Group Sergey Vakhrameev. Taking into account the fact that Novatek is attracting project financing for Yamal LNG, the break-even point for it is $7–7.5 per 1 mmbtu, the expert notes. “Yamal LNG is a long-term project, and gas prices may rise in a few years, which will increase the return on investment in the project,” reassures Raiffeisenbank analyst Andrey Polishchuk. But new Russian projects (Rosneft’s Far Eastern LNG, Gazprom’s Vladivostok LNG) have higher costs than Yamal LNG, so to implement them it would be logical to wait for oil prices to rise to about $80 per barrel, adds Vakhrameev .

Corrected version. The original published version can be viewed in the Vedomosti archive (smart version)