Asia warned! Cheap gas is gone...
by Nigel Wilson, Energy writer
The Australian

October 25, 2005
ASIAN markets would have to pay more for natural gas to bring them in line with sharp increases in prices elsewhere in the world, Woodside's chief executive Don Voelte has warned.

Gas prices quoted on the US Henry Hub market have almost doubled this year, topping $US14 ($18.67) for a million British Thermal Units as the US heads into winter and suffers supply disruptions from the hurricanes in the Gulf of Mexico.

Those prices are said by industry insiders to be roughly 2.5 times the effective price obtained by the North West Shelf for its confidential long-term contract sales to eight Japanese buyers, which are up for renewal.

Mr Voelte's views were contained in a speech he made to the Asia Pacific Economic Co-operation Forum in Sydney last Friday, which was released to the market yesterday.

They provide the background to the reluctance of Australian liquefied natural gas (LNG) projects -- such as the North West Shelf (which Woodside operates) and the Chevron-operated Gorgon project, planned for Barrow Island off the West Australian coast near Onslow -- to enter into long-term contracts at prices which company officials believe are unrealistically low.

Mr Voelte said Asia could not isolate itself from price movements in the rest of the world, particularly in the US. He said the recent increase in the US natural gas price "is likely to significantly increase the upward pressure on Asia-Pacific gas prices".

Also, limited regional supply choices and increasing energy consumption in the Asia-Pacific region mean Australian LNG projects offered "a unique and highly attractive proposition for customers in Asia".

Customer pressure to sign cheaper contracts emerged in 2002 after the North West Shelf partners succeeded in winning the first-ever contract to supply LNG to China. The Guangdong arrangement -- which is worth $25 billion and calls for the supply of 3.3 million tonnes of LNG a year for 25 years -- was criticised at the time as being too cheap.

While potential LNG customers, particularly from Japan, China and Korea, argue the Guangdong terms should be used as the base for new supply deals, Woodside said they were ignoring aspects of the contract which included Chinese equity in the North West Shelf gas reserves, contributions to the development costs of the huge project and what amounts to a tolling agreement for processing gas.

Mr Voelte's comments also suggest customers in Asia were ignoring the reality of a soaring world market for energy and a huge predicted shortfall in US capacity to meet its burgeoning demand.

Late last year Woodside missed out on a medium-term contract to supply LNG to Korea but at the time Mr Voelte said he was unworried because he believed the cheapest LNG in the region would come from Australia.

The Gorgon partners adopted a similar stance earlier this year when the Guangdong buyer, China's third-biggest petroleum company, China National Offshore Petroleum Corporation (CNOOC) pulled out of talks that would have resulted in Gorgon gas being marketed to other receival terminals being built in China.

CNOOC was told that if it could find cheaper gas to supply China's growing demand it was welcome to it.

Mr Voelte said China's demand for LNG was expected to increase 600 per cent by 2015 while the US market for gas was expected to grow from 22 trillion cubic feet a year to 30 trillion by 2025.

This equated to more than 140 million tonnes a year of additional LNG production.

Mr Voelte said historically Asian LNG prices reflected a supply overhang in the late 1990s and the early part of this decade which had to an extent shielded Asia from increased oil prices and US natural gas prices.

"This overhang has now largely evaporated and as LNG becomes more and more a global commodity, the increase in US gas prices is likely to significantly increase the upward pressure on Asia-Pacific gas prices," he said.