A looming gas glut world-wide is prompting Japanese and Indian firms to resell to European traders and utilities big chunks of US liquefied natural gas they had committed to buy several years ago, signalling tempered enthusiasm for US energy. The chance to ship LNG from the United States, where natural gas output is booming, was touted as the solution to Asia's soaring energy needs and mounting fuel import bill - and firms rushed in to grab a slice of the affordable action.
But after splashing out billions of dollars to build numerous plants to liquefy and export the gas by ship, at least three buyers spooked by the scale of their commitments and risks of heavy financial losses want out, in part. Moves to sell off supply are likely to boost global spot market liquidity as trading houses vie for the business and challenge the historical dominance of the oil majors.
Japanese utilities Tokyo Gas and Osaka Gas as well as India's Gail are dialling back on their US LNG commitments via stake sales after realising they cannot handle the initial surge of volume due to low demand at home. "The large volumes they have taken on are a risk in the near term, but they make sense in the longer term as gas demand across the region will grow," an industry source said.
More critical, they sense that overexposure to US gas markets could prove costly after a recent run-up in prices showed how the fuel's global competitiveness could be eroded. All three players have tapped European trading houses, energy firms and utilities, including Germany's E.ON, to take some of the LNG off their hands through five-year sales deals, sources from the companies approached have told Reuters.
"Most of these Far East players are realising they cannot handle exposures to the US Henry Hub (gas price) and now want to get rid of supply," said a trading house source whose company was approached by one of the sellers. Falling crude oil prices have sharpened anxieties about the cheapness of US LNG as many existing long-term gas supply deals in Asia reflect the price of Japanese crude imports.
With oil slipping below $100 a barrel, LNG deals linked to these prices become more attractive relative to US-gas price linked LNG, which has rebounded in recent years, traders said. Still, a true danger level for US LNG kicks in only if oil falls to $80 a barrel, seen as unlikely in the years ahead. The global LNG market has historically been dominated by oil majors including Shell, BP and BG Group hoarding supply and limiting access to new entrants, such as trading companies, whose arrival on the scene in recent years has renewed hopes of a growth spurt in spot trading liquidity.
While trading giants such as Vitol, Trafigura and Gunvor have established themselves as a force in LNG, helped by the gradual exit of US banks, they have not challenged the majors for market share as they did in crude oil trading in the 1970s. Opportunities like the current one provide space for such manoeuvring, say industry, company and trade sources. "The trading houses are looking at this as an opening," a source from another approached European company said.
Tokyo Gas, which bought 1.4 million tonnes per annum of LNG over 20 years from US East Coast project Cove Point, has offered to sell over half, or 0.75 million tonnes/year, to at least one southern European energy firm, a source there said. Its offer for a five-year supply deal was rejected due to the high price pitch, significantly above what it paid project developer Dominion Resources for LNG due to begin exports in 2017.
Part of the problem for Japanese players is that steps towards gas market liberalisation at home make it hard to know how much gas utilities will need going forward, traders there said. Following suit, Osaka Gas is offering five-year deals to Europeans and others from its 2.2 million tonne/year position at the Freeport facility, in Texas. The mark-up varies between sellers but in one case is at least $1 per million British thermal units (mmBtu) - a reference term used to express LNG prices - above what it initially paid, a source with knowledge of the matter said.
Buyers of LNG export capacity in the projects cited above paid 15 percent above the benchmark US Henry Hub gas price, currently $4 per mmBtu, plus a premium of $3-$3.20 per mmBtu, regulatory filings show. A Tokyo Gas spokeswoman and an Osaka Gas spokesman declined to comment. India's Gail, by far the biggest US LNG buyer of the three, is offering 1 million tonnes per annum for its first five years of supply from the Sabine Pass project on Louisiana's Gulf Coast, sources with knowledge of the matter told Reuters.