As America enjoys cheap gas, Asia's top buyers to pay more


* Already paying world's highest gas prices, Asia buyers setto pay more

* LNG contracts being renegotiated as demand outpaces supplyin region

* Cheap U.S. shale gas yet to make it onto global markets

By Meeyoung Cho and Rebekah Kebede

SEOUL/PERTH, Dec 16 (Reuters) - Asia's biggest economiesface paying twice as much for some natural gas as old supplydeals are renewed, with a North American shale glut years fromhelping to meet soaring demand in the region.

Rocketing prices will add billions of dollars to the powerbills of Asian nations and threaten competitiveness, but mean anearnings bonanza for LNG producers such as Malaysia's Petronas, BP and Australia's Woodside Petroleum.

Japan, South Korea, Taiwan and China bought 70 percent ofglobal liquefied natural gas supplies last year. They can spendfive times as much for the super-chilled fuel as U.S. buyers payfor piped gas.

While shale gas floods the United States, gas demand in Asiahas outstripped supply, in part because the world's two largestbuyers, Japan and South Korea, are buying more cargoes to makeup for power lost from their crippled nuclear energy sectors.

And as decades-old Asian supply contracts come up forrenegotiation, some producers are angling to double prices, athreat to economies heavily dependent on imported energy. That'sgot hard-pressed purchasers pushing to form a buyers' club toboost their bargaining power.

"We are importing energy with the money that we earn byselling semiconductors, steel and ships. As much as energyimport costs rise, it will hit our international balance ofpayments as well as our economy," said Yang-hoon Sonn, President& CEO of state-run Korea Energy Economics Institute.

South Korea faces one of the most immediate price rises asit renegotiates contracts with suppliers in Malaysia, Yemen andRussia, which account for nearly a quarter of its gas imports.

Accepting that higher prices are inevitable, Korea Gas Corp(KOGAS), the world's largest corporate buyer of LNG, is nowsimply in a race to get a better deal than other importers inthe region, company sources said.

LNG makes up around half of South Korea's energy bill ofabout 25 trillion won ($24 billion) a year, while only supplyinga fifth of its power.

South Korea has LNG contracts for 7.5 million tonnes peryear with Malaysia's Tiga LNG, Russia's Sakhalin, and Yemen LNG.

When the deals were struck at the turn of the century, gaswas cheap and still shedding its image as a by-product of oilproduction, often burned or "flared" on site.

LNG prices into Japan -- a benchmark for Asia -- were under$5 per million British thermal units (mmBtu) in 2000, comparedwith $19 per mmBtu on the spot market now .

"It was a buyers' market in the early 2000s when we hadsigned the deals, " the KOGAS source told Reuters.


Long-term LNG contract prices are typically calculated as apercentage of oil prices. Some contracts signed years ago wereagreed at 10 percent of the oil price or lower and have stucksellers with prices far below the current spot market rate.

KOGAS has paid an average of $8.25 and $6.05 per millionBritish thermal units (mmbtu) for Yemeni and Russian LNG,respectively, this year, a big discount to the average of $14.84for overall purchases due to long term contracts locked in yearsago with both suppliers.

Customs data show that South Korea paid $15.91 per mmBtu forMalaysian LNG in October, nearly double the $8.41 it paid lastyear, a jump mostly due to buying more supplies on the spotmarket, according to sources.

Japanese utilities are likely to face the same fate nextyear when prices on several supply contracts with Australia'sWoodside Petroleum are renegotiated.

LNG accounts for about 60 percent of Japan's spending onthermal fuel for power generation while providing nearly 43percent of its electricity.

Woodside expects the prices it receives for LNG to movetoward the Japanese average of around $15 per mmBtu. Some of itslowest priced contracts are around $8 per mmBtu, analysts say.

The jump in contract prices could boost its earnings beforeinterest, tax, depreciation and amortisation (EBITDA) and beforeexploration by more than a $1 billion, according to Citigroup.

Woodside declined to comment.

China's CNOOC also faces pressure from BP to raisethe long-term contract price for gas from its Indonesianproject, which is currently under $4 per mmBtu, to marketprices.


Soaring prices in Asia are in sharp contrast to the cheapgas in North America, which has yet to reach global markets.

Even when U.S. gas exports start later this decade, pricesmay be only slightly cheaper -- after accounting forliquefaction and shipping -- than existing LNG supplies.

Gas suppliers clearly have the upper hand in negotiations inAsia, at least for the next few years.

"I wouldn't like to be renegotiating now because it iscertainly a seller's market," said Tony Regan, an analyst withenergy consultancy Tri Zen International.

Yemen LNG has opened negotiations with an offer of 15percent of the oil price, above recent rates of 14 to 14.5percent, according to one source.

While that may be optimistic, it is not out of the realm ofpossibility, said analysts.

"It's difficult to see right now, in the next two or threeyears, where any major downward pressure is going to come from,"said Gavin Thompson, Wood Mackenzie's head analyst forAsia-Pacific gas and power.

View Comments (121)