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Heads up, B.C.: ‘Buyer’s club’ threatens Asian LNG pricing

As British Columbia's government gloats over the potential tax booty from selling liquefied natural gas to Asian power generators, it should cast a watchful eye over its shoulder to New Delhi, where a group of Asian governments have been chewing over the idea of an LNG buyer's club, a sort of OPEC-in-reverse that would seek to get better terms from gas exporters in the region.

This week's talks between Indian, South Korean, Japanese, Chinese and Taiwanese gas buyers are being held in the wake of soaring prices for LNG which are currently close to $19 per million BTU, a level that is almost five times the cost of natural gas at Henry Hub, the U.S. benchmark. Hardly surprising, then, that Asian governments are discussing drastic solutions and reports from Delhi suggest that India and Japan are already thinking about combined LNG tenders, in an effort to keep a lid on prices.

Japan's loss of nuclear power capacity, following the earthquake in 2011, has increased demand for natural gas in East Asia. But LNG, the only viable form in which gas can be widely traded in the region, is in short supply. There are huge projects underway in Australia, Mozambique and Russia which will bring new resources to the market, in addition to the proposed U.S. and Canadian exports, but these will not be available for two or three years. Meanwhile, Asian power companies are expressing disquiet about the terms on which they buy fuel – notably price indexation to crude oil and destination clauses in long-term contracts, which prevent the formation of a liquid trading market for LNG.

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Gas industry skeptics reckon that the buyers' club will struggle to get off the ground. The countries are too different in terms of their energy economies and commercial cultures to form solid alliances. While India has a reputation as a tough negotiator on imported fuel contracts, and is prepared to tolerate power blackouts rather than pay for immediate supply, for Japan power shortages would be unacceptable and the country has always been prepared to pay heavily for long-term security.

Nevertheless, impatience over long-term price indexing of gas to crude oil is gaining ground. OAO Gazprom and the European Commission are currently deep in negotiations in an effort to head off a formal prosecution of the Russian utility by DG Competition, the EU's anti-trust enforcer, for abusing its dominant position. The main complaints are restrictions on resale of gas shipments and oil indexation. Following the financial crash, Gazprom was forced to offer rebates to major gas buyers in Europe as demand for its fuel plummeted. The company is also under pressure at home to allow rival Russian gas producers access to export markets. Japanese and Indian companies are reported to be considering taking stakes in Yamal LNG, a Siberian project led by Novatek, Gazprom's Russian gas rival, which has secured President Putin's blessing in its quest for gas export markets. Cargoes of Norwegian LNG are already finding their way to Asia during the summer using a Northeast route through the Russian Arctic.

It is projects such as Yamal, and Gazprom's negotiation with the EU competition directorate, which may have more influence on the price of Asian LNG than the co-ordination of purchases by Asian power generators. Efforts by European utilities to act jointly in relation to Gazprom have repeatedly failed, as the Russian exporter was able to use its dominant position to divide and rule its customers. Market dynamics and the power of a unitary regulator have changed the balance of power in Europe's gas market. Asia lacks such a regulatory authority, but the arrival of new sources of supply from Africa, America and Russia will change the balance of power, just as Canada's nascent gas export industry begins to find its way across the Pacific.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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