Asia pays more for liquified natural gas (LNG), and that’s been the case for decades. Producers around the world have come to rely on this “Asian premium” to help justify the high capital costs of liquifying and shipping natural gas, but those days may be coming to a close. The WSJ reports:
The so-called Asia premium dates back to practices beginning in the 1960s. In a bid to secure a steady flow of fuel, Japan courted suppliers, offering to help finance the multibillion-dollar plants that cool natural gas into liquid form so it can be shipped more economically, and agreeing to long-term prices linked to oil prices.
Unlike the U.S. and Europe, Japan has limited access to cheaper pipeline gas and lacks a secondary market to provide price competition. That meant the inflated long-term contract prices remained unchallenged, giving rise to the Asia premium.
But now, a deluge of new LNG—in the form of U.S. shale gas and newly tapped sources from massive projects in Australia—is threatening to further exacerbate a supply glut.
The world is full up on LNG at the moment. Qatar and Australia continue to liquify huge amounts of the hydrocarbon, while the United States has just this year started to export its own domestic surfeit of shale gas in the form of LNG. Spot prices for LNG in Asia have slipped to all-time lows this year on this glut, but many buyers are locked in to long-term contracts that are linked to oil prices.
But this is now a buyer’s market, whether we’re talking oil or natural gas, and consumers are finding new impetus to push for sweeter deals as their options for suppliers grow. Buyers aren’t just looking to break from oil-linked contracts, they’re also pushing for the right to re-sell the gas they import, an important step towards spot pricing.
This is especially important to the world’s biggest LNG importer—Japan—which has had to significantly increase its imports of the gas in the wake of the Fukushima disaster and its resultant decision to bring the country’s fleet of nuclear reactors offline. However, this won’t be a welcome development for America’s nascent LNG exporters. Liquifying natural gas and sending it halfway around the world is an expensive proposition, and if Asia isn’t going to continue paying top dollar for LNG, producers around the world are going to have to work that much harder to stay profitable.