Chevron's Gorgon LNG to Push Asian Spot Trading

Chevron has started up its massive Gorgon LNG project in Australia and will soon be shipping more of the super-chilled fuel into an oversupplied market, eroding producer revenues but also likely hastening the advent of a liquid Asian spot market.

The $54 billion project, seen by many as symbolic of the era when high prices funded mega-projects of ever-increasing size, started production this week and may be the last piece required to establish a truly global natural gas market.

While producers may struggle to profit from such projects at current low prices, a supply glut is seen as necessary to creating the liquid spot market that Asia still lacks despite being home to 70 percent of global LNG consumption.

"LNG producers and buyers are becoming traders and aggregators. That means that we'll see more buyers selling and more sellers buying LNG," said Chong Zhi Rin, an analyst at Wood Mackenzie, at an industry conference last week in Singapore.

The global oversupply is not only giving buyers the upper hand but is also pushing the LNG market away from its traditional reliance on oil-linked pricing and long-term contracts.

"Homeless LNG accounts for more than a quarter of expected supply through 2025," said Jason Feer of energy brokerage and consultancy Poten & Partners at the same event, with a good portion of those uncommitted cargoes expected by analysts to go into the spot market.

Already producers like Chevron (CVX) and Woodside Petroleum , buyers like Japanese utilities and merchants like Glencore or Vitol, have expanded trading teams to handle the expected surplus cargoes.

Hoping to create regional LNG trading hubs, Singapore Exchange has launched a derivatives contract for the fuel, while CME Group is banking on a Japan-focused LNG contract.

The oversupply is also helping to remove the destination clauses that prevent buyers from re-selling cargoes and that are one of the key obstacles in creating a liquid market.

"It will be difficult for producers to insist on destination clauses," said Ben Smith, a partner at Norton Rose Fulbright, a law firm that advises clients on energy matters, including gas supply contracts.

Gorgon began production this week and is scheduled to export its first cargo by mid-March, Chevron said on Tuesday, less than one month after the another milestone was set in the United States when Cheniere Energy exported its first LNG cargo.

This wave of Australian and U.S. supply comes just as demand slows in the core markets of Japan, South Korea, Taiwan and China, pulling Asia's spot LNG prices <LNG-AS> down by 80 percent since 2014 to under $4.50 per million British thermal units.

Still, Chevron Chairman and CEO John Watson said in the company statement on Tuesday: "Gorgon will drive long-term growth and create shareholder value for decades to come.

"The long-term fundamentals for LNG are attractive, particularly in the Asia-Pacific region."

Reporting by Jacob Gronholt-Pedersen and Henning Gloystein