Producers and importers of liquefied natural gas (LNG) are preparing to trade the fuel more actively on a spot basis as a looming supply surplus threatens to overwhelm decades-old bilateral contracts and pressure prices lower.
With the advent of 130 million tonnes of LNG capacity in Australia and North America by 2020, producers such as Woodside Petroleum and Chevron, and traditional buyers such as Japanese utilities, have expanded trading teams to handle excess cargo flows and navigate a more open market.
Australia, with investments of almost $200 billion in new production, is on track to overtake Qatar as the world's biggest LNG exporter before the end of the decade.
In North America, U.S. company Cheniere Energy plans to export its first LNG cargo in January, and Canada is also planning to start exports in the next few years.
"Buyers will be able to have their choice ... (of) very large supply sources that can deliver pretty much at a moment's notice," Cheniere Chief Executive Charif Souki said this week at a conference in Singapore.
Excess supply, along with rising demand, is key to establishing a liquid commodity market as in tight conditions producers and consumers tend to enter long-term fixed supply agreements rather than trade openly.
And while new demand is popping up in countries such as Jordan, Dubai, Egypt and Pakistan, it is unlikely to be enough to offset the slower-than-expected consumption growth in China and the falling demand in top importers Japan and South Korea.
Some major players in the industry disagree, though, on how quickly a robust spot market will develop.Last year, less than 5 percent of total volumes were sold on a prompt delivery spot basis, said Ann Collins, vice president for LNG at BG Group, at Gastech on Thursday.
"A rapid tilt towards a commoditization of LNG seems unlikely in the near term," she said.
Still, Ernst and Young (EY) says liquefaction capacity has more than doubled since 2000 and exceeded demand last year.
This surplus, along with slow-growth demand, will keep prices under pressure until the end of the decade, consultancy Wood Mackenzie said in statement this week.
BUYERS TO SELLERS
Japanese power utilities - traditionally strictly buyers of LNG for gas-fired generators - are selling to each other or reselling to emerging smaller local buyers, even as nuclear reactors restart and the country's overall electricity demand falls with a shrinking population.
Japan's JERA Co, a joint venture set up by Tokyo Electric Power and Chubu Electric Power, will renew only a minimum of the long-term contracts that supply 80 percent of its gas, and instead meet its needs via mid-term and short-term contracts or spot purchases.
Australia's Woodside, one of the biggest producers of LNG, has traditionally sold its volumes on contracts that last 20 years or more, yet now says it needs more LNG tankers to deal with rising spot and short-term sales.
"We're becoming more sophisticated in our marketing and trading activities," Chief Executive Peter Coleman told reporters at the industry meeting this week in Singapore.
Chevron, which up to now has also dealt mostly in long-term supply agreements, has established an LNG trading desk in Singapore to handle output - mainly from its Australian projects - that is not committed to buyers.
Commodity trading houses are also getting ready for the increase in supply, with Glencore planning to double its trading team as it mounts a challenge to rivals Trafigura and Vitol to become the top merchant LNG trader.http://www.reuters.com/article/2015/10/30/lng-surplus-trade-idUSL3N12N2PV20151030