Strong global demand is likely to limit the downtrend in Asian prices for liquefied natural gas (LNG), but abundant new capacity and the bargaining power of energy-thirsty China will keep the market under pressure.
Lower prices are spurring demand for super-cooled, compressed natural gas from main users such as power plants as LNG narrows its price gap with cheaper coal, which accounts for 88 percent of fossil energy resources in Asia, experts say.
Prices for LNG have fallen steeply in the last three to four years, especially after booming China locked in multi-billion dollar, long-term supply contracts with Australia and Indonesia.
Energy-industry bankers in the region say China paid less than $3 per million British thermal units (mmBtu) for LNG for its first two import terminals, way below the $4-$5/mmBtu recently paid by the world's number one and two buyers, Japan and South Korea.
"The general feeling is that when the Korean and Japanese contracts come up for renewals, there is going to be downward pressure on those pricing contracts," said a Hong Kong-based banker with a global investment bank.
"Going forward, I think there will be a whole lot of re-rating of the pricing environment. The buyers have more power now," he said.
Global LNG flow would rise to about 200 million tonnes by 2010 and 315 million tonnes by 2020, from 120 million tonnes last year, on expected growing demand from the United States, China and India, said Hassan Marican, president of Malaysia's Petronas, citing forecasts by the International Energy Agency.
Malaysia is the world's third-largest LNG exporter.
LNG imports by the US alone are set to rise to 99 million tonnes by 2025 from 11 million tonnes in 2003, said the Jakarta-based ASEAN Centre for Energy (ACE).
"Offsetting the potential drop in pricing is the increase in volume. The market is broadening," the banker in Hong Kong said, referring to the entrance of buyers such as China and India that could now afford to buy in bulk.
However, with LNG producers in Asia, the Middle East, Africa, Russia and South America expanding capacity or building new plants to meet rising demand from the new markets, price competition is set to intensify, experts said.
"The bloodbath is going to start," Hassan said in a speech in Singapore earlier this month. "With the new and expansion projects, there would be surplus, I believe, of LNG in future."
This is music to the ears of LNG buyers.
"We see the downward trend of pricing will continue. One reason is the competition in supply. The major reason is the significant cost reductions achieved in the last several years," Shigeru Muraki, general manager of Tokyo Gas Co Ltd's gas resources department, said at a conference in India.
But some experts say LNG prices would have little room to extend falls unless costs can be cut further to hike supplies. After all, prices must justify the costs of development, transportation, liquefaction and extraction, they said.
"We have seen, effectively, the bottom of the market and there is a good chance we will start to see a firming of Asia-Pacific LNG prices," said Andrew Faulkner, vice president of Shell Power & Gas North Asia, based in Singapore.
Officials at the world's biggest single LNG buyer, state-run Korea Gas Corp (KOGAS), said they expected prices to have little downside as the firm planned to seal term deals soon for supplies from 2007 at prices below what they were paying now.
"After 2010, China will soak up LNG as a black hole in the energy market, the United States will do so and demand in Europe will also rise, then the LNG market will turn into a sellers' market," KOGAS Chief Executive Oh Kang-hyun told an investor relations meeting.
KOGAS's demand for fresh supplies is estimated at more than 3.3 million tonnes per year (tpy) as its 2.3 million tpy long-term contract with Indonesia is due to expire in 2007.
LNG, first imported by Japan in the 1960s, is mainly traded via term contracts. But spot trading may grow from about 10 percent to 30 percent of global capacity in 10 years as electricity firms seek greater pricing flexibility with the deregulation of the global power market, Hassan of Petronas said.
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