LONDON Oct 8 Liquefied natural gas (LNG) will
continue to be benchmarked to oil prices for several more
decades, outgoing BG Group Chief Executive Frank Chapman
said on Monday, despite complaints by top Asian importers that
supplies are unaffordable.
Long-term, oil-indexed contracts will remain the cornerstone
of security of supply for Europe and Asia, given its growing
dependence on supply from only few foreign gas-producing
sources, Chapman said during a gas conference speech in London.
Chapman, who heads one of the world's biggest LNG trading
firms, said that long-term LNG supplies will only ever be priced
against the fundamentals of supply and demand of gas once spot
markets for the fuel become more liquid and transparent.
"I don't see that anywhere close in the LNG market now, and
it will take decades for it to happen," he said.
"If you want a fully liquid market you must have many
sources of supply and many sources of demand," Chapman said.
"You need somebody to build a merchant plant, a merchant
importer and the existence of a defined end-user that you can
sell to," he said.
The LNG market is dominated by heavyweight producers Qatar,
Algeria, Nigeria and Australia who predominantly fix supplies in
long-term contracts tied to oil prices.
Volumes from liquefaction plants are sold largely as part of
long-term deals, with minimal volumes reserved for spot trade on
a merchant basis.
Producers have defended the practice of selling LNG linked
to oil prices amid a growing backlash by consumer countries who
want the fuel to reflect fundamentals specific to oversupplied
and comparatively cheap gas markets.
Top importer Japan amassed a record trade deficit in the
first-half this year partly due to a surge in oil-indexed LNG
imports following the closure of nuclear power plants after the
Fukushima disaster in March 2011.
Tokyo Gas Chief Executive of Energy Solutions
Division Shigeru Muraki warned that LNG will have to compete
with other fuels including cheap coal and oil if prices stay at
current high levels.
"The current price linked to oil is currently $17 (per
million British thermal units)," Muraki said, adding that
Japanese utilities will prioritize purchases of much cheaper
U.S. gas exports once they come onto the market.
Booming shale gas output in the U.S. has opened up vast new
reserves that companies hope to export from 2015 in the form of
Cargoes exported from U.S. terminals would be linked to
cheap domestic Henry Hub prices plus a small premium which
nevertheless is heavily discounted to prevailing global LNG
Consumer countries hope that this new source of cheap LNG
supply will help to undermine existing oil-indexed price
mechanisms by making them less competitive.