* Tight market offers producers chance to boost prices
* Profits could triple on Asia-Pacific deals
* Import costs for Asian LNG buyers to surge
* Producers looking to scrap oil price caps
* Petronas-Kogas deal a benchmark
By Rebekah Kebede and Oleg Vukmanovic
PERTH/LONDON, Jan 21 Locked into hefty discounts
for nearly a decade, producers of super-cooled liquid natural
gas could triple their earnings as surging demand gives them the
upper hand in contract reviews with big buyers in Asia.
In what was still a fledgling market in competitive LNG
tenders, Japanese, South Korean and Chinese buyers secured deep
discounts in deals largely done five to eight years ago.
LNG prices were falling and sellers gearing up to fund
billions in new LNG plants jostled to lock in 20-year deals.
Yet with global gas prices now more than double 2010 levels
at $19 per million British thermal units (mmBtu), buoyed by
Japan's nuclear crisis and China's appetite for energy,
producers have ambitious hopes for renegotiating such contracts.
Sellers looking to sweeten deals include Australia's
Woodside, Russia's Gazprom, France's Total
, Royal Dutch Shell and Yemen Gas Company.
A taste of what could come was seen in a deal concluded by
Malaysia's Petronas which tripled the price South
Korea's Kogas will pay for LNG from its Tiga plant
"The Tiga deal will serve as a guide price for others and it
will be interesting to see what Qatar does given that Petronas
got a deal below the magical 14.85 percent (of oil) price," one
That level reflects the international price of long-term LNG
supply adopted by top producer Qatar as well as Australia in
Buyers on the other side of price reviews currently under
way include Kogas, Japan's Tokyo Gas, Tokyo Electric
Company and Kansai Electric and China's
National Offshore Oil Company (CNOOC).
Buyers and sellers are tightly guarded about the commercial
terms of their contracts, yet industry sources expect major
price hikes given market conditions.
Not only has demand from Asian and South American countries
surged but supply has been constrained by unrest in Yemen,
sabotage in Nigeria and curtailed exports from Egypt and
Indonesia due to higher domestic use.
"The market is going to be so tight this year, there is just
no need for (sellers) to concede," said Tony Regan, an LNG
analyst with Tri Zen International in Singapore.
LNG output rose 1 percent last year but that was after a
rare fall in 2012 - just the fourth ever - as production fell by
1.6 percent to 238 million tonnes.
There hasn't been a slump of that size since 1980-1981 when
Algeria halted exports to the United States in dispute over
Producers stand to boost annual earnings by hundreds of
millions of dollars if they can match the prices which Petronas
achieved with Kogas.
Woodside, Australia's largest exporter of the fuel, is among
the sellers that could benefit most.
It could rake in up to $1 billion in additional pre-tax
earnings next year from just two supply contracts from its Pluto
LNG plant, according to Reuters calculations and industry
Under the two contracts it supplies Japan's Kansai Electric
and Tokyo Gas with 3.25-3.75 million tonnes of LNG per year.
Woodside currently earns $7-8 per mmBtu, a price which industry
watchers say could double in renegotiated deals.
Woodside is also in negotiations with China's CNOOC which
gets LNG from Woodside's North West Shelf plant for just $3.25
Britain's BP is also expected to raise the price it
charges CNOOC for 2.6 million tonnes per annum (mtpa) of LNG
from Indonesia's Tangguh LNG plant.
With oil prices back up to $110 a barrel following the
2007-2008 global financial crisis, part of the aim of producers
in contract reviews is to scrap or amend price caps linked to
the price of a barrel of crude.
Oil price caps have held down the price which producers in
Yemen, Russia's Sakhalin 2 venture, Indonesia, Australia's North
West Shelf and until recently Malaysia's Tiga could fetch under
The caps also meant producers lost out as crude oil prices
surged from $40 in 2005 to $147 per barrel in 2008 in one of the
biggest commodity price rallies in history.
Woodside's deal with CNOOC supplied from its North West
Shelf LNG plant includes an oil cap of just $25 per barrel, the
Petronas struck a new pricing formula with Kogas at 13
percent (of the price of Japanese crude oil imports, or JCC, a
regional benchmark), according to one source with knowledge of
Kogas will pay around $13.50 per mmBtu when crude oil trades
at $100 a barrel including a fixed premium of $0.50 per mmBtu,
said two other sources with knowledge of the deal.
That marks a steep jump from the contract's previous terms
of $4-$5 per mmBtu tied to an oil price cap of $40 a barrel.
Smarting from years of poor returns, Yemen launched its
price review with Kogas for a 2 mtpa, 20-year supply deal by
proposing a 15-percent link to JCC, two industry sources said.
Yemen and other producers are likely to strike renegotiated
deals at $10 to $14 per mmBtu, depending on terms of the legacy
contract, said Karthik Sathyamoorthy, head of Asia Pacific at
oil and gas consultancy Galway Group in Singapore.
On a typical cargo of 140,000 cubic metres, that could mean
an additional profit of up to $40 million per shipment.
For BP, future annual earnings from its Tangguh project in
Indonesia could rise by as much as $500 million, although
Chinese buyer CNOOC has responded to Tangguh's initial
renegotiation terms with a lower counter-offer, several sources
CNOOC is currently paying $3.45/mmBtu due to an oil price
cap of $38 a barrel, which BP aims to scrap in favour of an
uncapped market rate.
Indonesia also wants any new price applied retroactively to
2013 sales, an industry source added, which could require CNOOC
to pay the Tangguh stakeholders an additional $1.5 billion in
rebates for deliveries made last year.
"(China) can afford it. They are importing LNG along the
coastal market and they are paying for gas at Asian market
prices," BP Asia-Pacific President William Lin told Reuters late
Russia's Sakhalin 2 LNG export plant, which earns less than
$3 per mmBtu on some deals, has offered 14.7 percent of JCC in
its first round of contract reviews with Tokyo Gas and Tokyo
Electric Company, sources said.
On the other side of the table, producers seeking ambitious
mark-ups face buyers in Asia who are keen to cap surging gas
import bills, led by Japan's energy ministry.
It aims to set a ceiling price for LNG imports estimated at
$13-14.50 per mmBtu. The exact level it sets will be determined
by the lowest price Japanese utilities achieve in price reviews
with long-term suppliers.
Buyers are also armed with the knowledge that while market
terms currently favour sellers a tide of new supply from
Australia, the United States, Canada, Russia and East Africa is
expected to hit the market between 2016 and 2021.
That means importers such as Japan and South Korea which
have traditionally had few ready alternatives could see up to
350 mtpa in additional LNG in the years ahead.
Any additional cash that producers do generate is unlikely
to spur much new investments, however, as companies around the
globe come under pressure to rein in spending and return cash to
"You're going to see companies distribute a lot of that
additional income back to shareholders, which is what we are
seeing in the industry at the moment," said Neil Beveridge, an
oil and gas analyst at Bernstein Research in Hong Kong.
"More companies are pursuing share buybacks, dividend
payouts, which is what investors are looking for."
(Additional reporting by Niluksi Koswanage in Kuala Lumpur;
editing by Jason Neely)