LNG producers turn to trading, risk taking to maintain market share

Wed Apr 5, 2017 5:30am EDT
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By Osamu Tsukimori and Aaron Sheldrick

CHIBA, Japan (Reuters) - Producers of liquefied natural gas (LNG) have shot themselves in the foot with oversupply, and face calls for flexibility and greater competition from other fuels that may force them to take more risks and start trading just like other commodity dealers.

That's a big change for a market long dominated by large producers such as Royal Dutch Shell (RDSa.L: Quote) and BP (BP.L: Quote) who provide major importers with fixed volumes under multi-decade contracts linked to the price of oil LCOc1.

Under the protection of these lucrative locked-in deals, producers in Australia, Qatar, Russia and elsewhere went on an investment spree that left them with a huge supply overhang when demand in China and India developed more slowly than expected.

That, together with rising fuel competition from coal and renewables, contributed to a more than 70 percent crash in spot Asian LNG prices LNG-AS to under $6 per million British thermal units (mmBtu), increasing the pressure to grant more flexible contracts and better pricing options.

"The LNG market is changing rapidly, (and) the large volume long-term contracts that traditionally underpinned the development of the industry are today much more difficult to obtain," said Steve Hill, executive vice president of Shell Eastern Trading, during a gas conference in Japan on Wednesday.

"LNG projects ... need to take more market risks," he said.

In a sign of what might be ahead, Japan's JERA - the biggest single importer of LNG - and France's Total SA (TOTF.PA: Quote) are set to strike its first deal soon with flexible volumes that are based on Asia LNG spot prices.

JERA's chief fuel transactions officer, Hiroki Sato, confirmed the imminent deal to Reuters on Wednesday in an interview at the Gastech conference.   Continued...

FILE PHOTO: A membrane-type liquefied natural gas (LNG) tanker is moored at a thermal power station in Futtsu, east of Tokyo, Japan February 8, 2017.  REUTERS/Issei Kato/File Photo