Low Domestic Prices to Undermine China＇s LNG Imports

According to Business Monitor International  (BMI), Chinese state owned Sinopec is looking to offload shared in its long term LNG sales and purchase agreements (SPAs). The SPAs under negotiation are said to include a 5.85 billion m3 contract with Origin Energy’s Australia Pacific terminal and a 2.72 billion m3 contract with ExxonMobil’s Papua New Guinea LNG. Both contracts come into effect in 2015, for a period of 20 years.

The need for imported LNG has been further eroded by the major supply deals signed with Turkmenistan and Russia in recent years, adding more than 100 billion m3 in pipeline import capacity. The preference for pipeline gas is in large part due to its lower price. The price of piped gas is estimated in a range of US$3 – 12/million Btu; LNG imports are significantly more expensive, in a range of US$4 – 20/million Btu. Legacy contracts with countries such as Indonesia and Australia account for the lower end of this spectrum. Contracts yet to come into force, and signed in recent years in a context of tight supply, rising demand and elevated Asian LNG prices, will be significantly less generous. The SPAs with both Origin and Exxon fall within this bracket.

According to BMI, the recent sharp drop in oil prices, to which LNG contracts are linked, should provide some relief. LNG contract pricing lags spot pricing by approximately six months, so lower prices will feed through by Q2 2015. However, in terms of the Chinese gas market, the lower prices will offer little competitive advantage to LNG importers. The bulk of China’s pipeline imports are also indexed to oil, and so the differentials will remain broadly unchanged.

Given the rise in LNG supplies globally, and weakening demand from the other major LNG consumers – Japan, South Korea and Taiwan – Sinopec may struggle to offload shares in its long term SPAs. A sustained lower oil price environment and loosening supply and demand dynamics point to a longer term decline in global LNG prices. In this context, buyers may be reluctant to tie in to 20 year supply contracts and Sinopec may be forced to discount its prices.

(energyglobal.com Edited by Topco)