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Qatar Sells LNG At Fixed Price Exceeding $10/M BTU For 20 Years.

The state-owned Qatar Petroleum (QP) has recently achieved a coup in the LNG business by selling 2.1 million tons per annum of liquefied methane to South Korea at a fixed price of $10.70/million BTUs effective for a 20-year period. The contract is based on a take-or-pay (ToP) clause, to which a commitment was signed by the state-owned Korean Gas Company (Kogas).

The contract, part of a "strategic co-operation pact" between Qatar and South Korea, had been negotiated since early 2006. Repeatedly, Kogas has tried by failed to get the price lowered in view of a 20-year advance commitment. But the chief negotiator on the Qatari side was none other than Abdullah bin Hamad Al-Attiyah, the minister of energy and industry as well as second deputy prime minister and head of QP.

Attiyah's tough negotiating position reflected the strength of Qatar becoming the world's biggest exporter of LNG and an indispensable source in view of declining LNG supply from Indonesia. Attiyah is said to be negotiating with another Asian buyer for two- to three-year periods at a price range of between a "low" of $11/m BTUs being offered by the latter and $14-16/m BTUs being asked by the Qatari side.

The 40-year-old trade in LNG from the Middle East is thus seeing major changes. While LNG trade has traditionally been conducted on a long-term contractual basis, one-off and non-committed spot deals are coming to the fore.

Last month, Qatar Liquefied Gas Company (Qatargas) signed a 60,000-ton spot cargo deal with a leading Japanese power utility at a price of over $11.50/m BTUs. While there has been a steep rise in domestic demand for gas in the Persian Gulf, the global LNG industry is increasingly keen to secure supplies from the spot market under commercial rates favourable to the sellers. In some cases, the spot dealing resembles an auction, with LNG cargoes going to the highest price bidder.

Henry Hub prices recently peaked at $13/m BTUs, which has since encouraged sellers to toughen their positions. India's Petronet is seeking several spot LNG cargoes from producers in the Gulf and North Africa. But Qatar is in the lead in pursuing opportunities to sell spot cargoes in Asia at high prices.

This follows further cuts in Indonesian LNG exports, delays to greenfield projects in Australia and concerns about the fate of the Sakhalin-II mega-venture in Russia. So Japan, South Korea, Taiwan, China and India are driving demand. With winter setting in, demand will be pushed harder, with utilities seeking additional volumes.

Japan is looking for 40 additional cargoes on spot basis. Spot LNG shipments are arriving in India every 15 days from Malaysia, Qatar and Algeria.

MEED on Nov. 24 quoted Tilak Doshi, executive director for energy at Dubai Multi-Commodities Centre (DMCC), as saying: "It is estimated that 10 per cent or more of [world] LNG sales is [now] spot. Increasingly, gas is sold on a non-committed basis. The number of buyers and sellers is growing and they are utilising greater flexibility".

The benefits of contractual flexibility are one of the factors behind a $1,000 million project for a new LNG storage and trading facility in Dubai. The 1.8 million-3 million-ton LNG storage hub, to be built by DMCC and Impel LNG of Canada, will be the first of its kind in the region. The developers argue Dubai's geographical location will put it in a prime position for LNG trading, considerably reducing both transportation cost and time. MEED quoted Doshi as noting: "Dubai is equidistant from the sellers in the US and buyers in the East. It also has the advantage of being close to the LNG producers in Qatar, Abu Dhabi and Oman".

Significant price differentials will benefit the proposed Dubai storage hub scheme. "It is much more attractive to buy spot cargoes when the price is low, store it and regasify it during winter", Doshi says, adding: "The seller benefits from the same economics as the buyer. Storage offers flexibility to the demand or supply side".

In the meantime, certain bottlenecks need to be addressed. MEED on Nov. 24 quoted Divay Goel, director and head of India operations at the UK's Drewery Shipping, as saying: "A lack of sufficient shipping capacity and the growing capital cost of building new vessels are major hindrances. The market is extremely tight and demand is soaring".

It is unlikely that new vessels will be built to meet the demand for spot shipments, as higher steel prices and limited shipyard capacity have driven costs upwards. Two years ago an LNG carrier with capacity of 148,000 cubic metres would cost about $160 million to build. Today, a vessel of similar size will cost about $225 million. There are no incentives for ship-owners to order new vessels now without a long-term environment.

Yet another factor holding back the development of a spot market is the gradual increase in the price of spot LNG. Compared with levels of $3/m BTUs in the 1980/90s, the rate now stands at $11/m BTUs. Doshi said: "Spot and long-term prices are now running in parallel".

There is unlikely to be an easy solution to these issues - but underlying demand for LNG spot trading will continue to grow.

To keep up with demand, LNG producers will need to bring additional volumes to the market. With Pacific and Atlantic basin producers no longer being in a position to supply their own markets independently, the onus will fall on Qatar and other Persian Gulf producers. But apart from Qatar, which is forging ahead with ambitious plans to increase its LNG exports to 83 million tons per annum by 2014, they are lagging behind. As a Tokyo-based industry executive puts it: "For Adgas [Abu Dhabi Gas Liquefaction Company], Oman LNG and Qalhat LNG, the emphasis will be on their long-term commitments".
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Publication:APS Review Gas Market Trends
Date:Nov 27, 2006
Previous Article:ABU DHABI - Exploration Background.
Next Article:India & Iran Still Negotiating LNG Price.

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