Buying LNG is usually accomplished through a short-, medium- or long-term contract. LNG may be purchased as an “individual cargo” — also called a spot transaction.
Buyers and sellers each can handle the shipping of the LNG once a contract is in place. “Free on Board,” or FOB, describes a sale where the buyer arranges for the shipping. CIF, or Cost, Insurance, Freight, describes a transaction where the seller arranges for shipping. DES, or Delivered Ex Ship also describes a transaction where shipping is arranged by the seller.
In 2012, there were 27 countries buying LNG. Asian countries bought 70 percent of the total with Europeans buying 20 percent, North and South America at 4 percent each and the Middle East at 2 percent. Projections for 2030 show South America growing to 6 percent, the Middle East to 4 percent and North America dropping to 2 percent.
The fastest growth is projected to come from the smallest market — the Middle East and Africa, with Kuwait being the biggest driver.
In Asia, Japan is the largest destination for LNG. Buyers include utilities like Tokyo Electric and Tokyo Gas. South Korea is also an active buyer of LNG for companies like Korea Gas Corp. or KOGAS, and manufacturing companies who import LNG for their own use. Chinese companies like PetroChina and Sinopec add to the growing demand for LNG in Asia.
While demand for LNG is rising, big supplies are not expected before 2015. Major Australian projects are expected to enter the market in 2014, but most of the new projects, many from North America, are projected to come online in 2015. With a rise in demand of 7 percent a year through 2020 this gap between supply and demand will result in a narrow market.
New sellers are slowly emerging. In Russia, the government recently passed legislation that allows LNG exports to Asian markets. LNG exporters in East Africa and the East Mediterranean are scheduled to enter the market before 2018.
The complex nature of LNG transactions demands that the buyers and sellers who are negotiating LNG contracts, which are typically long-term, understand every detail of the global LNG market. Understanding methods for determining prices in this fluid market is critical to avoiding wrong sourcing decisions and significant negative financial impacts as well as legal liabilities.
In an Oct. 4 Energy Inc article entitled “LNG contract sales are ripe for a Shakeup,” Jason Burner highlights the first LNG Producer-Consumer conference that was held in Tokyo last year. The conference was held to provide Asian LNG buyers an opportunity to lobby for lower prices and more flexible contract terms. A second conference was held in Tokyo in September of this year with more than 1,000 delegates. The traditional LNG contract model with pricing linked to oil is a target of Asian buyers who see it as inflexible and outdated.
A contract signed by the BG group underscores the importance of “safeguarding your interests as circumstances change” in the LNG market.
In a July 2012 Financial Post article, Edward McAlister refers to the contract as the “world’s sexiest LNG contract.” McAlister notes that “In signing up to buy all of Equatorial Guinea’s liquefied natural gas for 17 years, Britain’s BG Group unknowingly sealed one of the most lucrative LNG deals ever. The 2004 contract generates nearly $1 billion a year for BG, and lets it keep almost all profit from gas it sells at five times the price in Asia…” A lesson was learned, and McAlister adds, “Exporting countries are becoming increasingly knowledgeable and are pressing for better returns for their resources.”
In our next issue we’ll look at spot market, pricing of LNG and other economics.
This is the eighth in a 10-part series produced by the Alaska Support Industry Alliance to educate the public about liquefied natural gas.