Cost management collaboration to help LNG producers

An analyst says this is due to the high capital and commitment required for LNG-based projects


Liquefied natural gas (LNG) producers are not expected adopt a cartel-type approach to collectively curb gas production, but instead seek to cut costs across the whole chain, said analysts.

Petroliam Nasional Bhd (Petronas) has warned that the LNG sector is heading for stagnation unless producers and users collaborate. Gas prices are trading at around US$3 (RM12.69) per million British thermal units (mmBtu) compared to the peak of US$6.135 per mmBtu in 2014.

Besides rising production, key LNG markets which traditionally purchase gas to heat building, are turning to renewable energy and more efficient structures to keep warm.

A research analyst said LNG producers could explore cost management measures across the entire value chain due to the high capital and commitment required for LNG-based projects.

“Infrastructure costs for producing gas are more expensive than for oil production. It also necessitates long-term agreements from anywhere between 20 and 35 years,” said the source, who spoke under condition of anonymity.

“When Petronas spoke of collaboration, they are likely referring to bringing costs down across the LNG value chain — including extraction, production and exporting — while looking at contract renewals that reflect the needs of the industry.”

The analyst said bringing together the relevant stakeholders to form a cartel similar to that of the OPEC would be redundant, as the oil and gas (O&G) interests are closely related.

“LNG prices are closely related to oil prices. O&G are usually extracted from the same reservoir, and OPEC — through the collective production cuts — protects the interest of gas as well.”

Malaysia was the third- largest LNG exporter in 2016, shipping abroad 25 million tonnes and commanding a 9.7% market share.

Qatar remained the market leader with LNG exports totalling 77.2 million tonnes at a 29.9% market share that year, trailed behind by Australia who shipped 44.3 million tonnes for a 17.2% market share.

Despite LNG trade reaching a record 258 million tonnes in 2016, supported by additional supply coming in from the Pacific Basin and the Gulf of Mexico coupled with strong demand in Asia, Asian and spot LNG prices continued to downtrend for the year.

The average Northeast Asian spot price in 2016 was US$5.52 per mmBtu.

Another industry analyst said LNG price recovery will be contingent on oil prices. However, such improvements are improbable, as crude prices are predicted to remain at stable but moderate levels.

“LNG sellers which comprise national, non-national and independent producers are cancelling and putting on hold projects, while delaying final investments to reduce their risk to the low price environment,” said the industry analyst.

“If a producer were to lock in on prices at current levels, there is no guarantee that they will not incur escalating costs over the period of the contract for the LNG project.”

The market is anticipating new LNG supplies from Australia and the US will create an oversupply situation that will not balance out until 2024 or 2025.

Decisions on large-scale LNG projects are not expected until after 2019.