LNG Industry Needs Flexibility to Avoid Boom-and-Bust Future
Liquefied Natural Gas (LNG) buyers and sellers need to embrace flexible trading practices, including cargo swaps, to cut costs and avert repeated painful boom-and-bust cycles, industry players told a conference on Tuesday.
A wave of shipped gas expected to hit the market with the launch of U.S. and Australian supplies, weak demand and the high costs of bringing new production online could all combine for an uncertain future, they said.
"Everybody has to change their game," David Ledesma, an independent gas consultant and senior research fellow at the Oxford Institute for Energy Studies, told the European Gas Conference. "If they don't they are going to get left behind."
"Buyers and sellers must work together or we will have boom-and-bust."
Importers are already seizing the chance to wring concessions from existing producers wary of losing market share.
A taste of what could come was seen in 2010-2014 when Russian gas producer Gazprom gave its European pipeline clients, smarting from steep import bills, deep discounts to avert arbitrations and repair ties.
This time, global LNG buyers will seek changes to the way long-term contracts are structured in the $120 billion annual trade, such as loosening restrictions on cargo diversions and reducing imports below agreed floors. Pricing disputes may take a backseat.
While sellers must better optimize where they send their cargoes due to low margins and prices, buyers must also meet sellers half way when striking deals in an environment where future market uncertainty could make new projects too costly and risky, the industry players told the conference.
Andrew Walker, vice-president of strategy at Cheniere Marketing, told the conference he expected to see more swaps and other strategies between buyers and sellers to reduce costs and improve LNG trade.
"We are a 50-year-old industry that has had relatively few cycles and experiences of cycles," he said. "As we try and draw that line forward it is difficult because we don't have a history of cost reduction. But if we don't we are gong to have a less bright future than we ought to."
Andy Williamson, head of LNG supply at EconGas, said flexibility over pricing will be key for market players looking to displace pipeline gas with LNG.
"We are about to enter into a great game of limbo dancing," he said. "The global LNG market is going to set a bar and everyone is going to have to dance under it."
(Reporting by Michael Kahn)
