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Oil rout will save Asian LNG importers billions this year

[MILAN] A steep drop in crude oil prices will save top Asian economies tens of billions of dollars on their liquefied natural gas (LNG) import bills this year, cutting electricity costs for consumers after years of pain.

Prices of long-term LNG supplies delivered by tankers to Asia are tied to the cost of Brent crude oil, which has fallen by more than half since June.

The extent of oil's price slide has not yet been fully passed through into lower Asian LNG sales prices because contracts have delays of six to nine months built into them.

A classic pricing formula for a 20-year LNG supply deal is composed of a "slope", or per centage, to crude oil, usually set at 14.85 per cent as seen in recent sales from Australia and Papua New Guinea to Asian buyers.

So when oil trades at US$100 a barrel, the LNG price is US$14.85 per million British thermal units (mmBtu), plus a small premium of around US$0.80 per mmBtu added on top.

"The fall in oil prices will slash the LNG bill for Japan, South Korea, China and Taiwan by over US$35 billion in 2015 compared with prices in 2014," said Kwok Wan, head of the LNG desk at price reporting agency Argus.

The four countries imported a combined 116 million tonnes of oil-linked LNG last year, around half the total for Asia.

The discount is calculated using the Brent crude oil forward curve for 2015, which gives the current cost for Brent crude for delivery from now until the end of the year.

For Japan and South Korea, it should provide welcome respite for retail electricity consumers by reducing utility bills sent soaring following Japan's 2011 Fukushima nuclear disaster, which spurred gas demand across the region.

Collapsing oil prices have made long-term, oil-linked supply cheaper than supply procured on spot markets for the first time in years.

The current spot LNG price for March delivery is US$9 per million British thermal units (mmBtu), compared with a long-term LNG price of just under US$8 per mmBtu, according to Thomson Reuters analysts.

Once the current cost of oil at US$50 is fully factored into gas contracts, the long-term price could sink down to around US$6.50 per mmBtu, establishing a sizeable discount to spot prices.

"If LNG is bought under an oil index contract buyers will make savings, not right away, but from the second-quarter 2015 the lower oil prices will feed into lower LNG contracted prices," Societe Generale analyst Thierry Bros said.

"These are midstream companies so they will have to pass this to customers," Mr Bros said. "We will pay less for energy."