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LNG supply gap may form as investment drop stymies projects

[CHIBA, Japan] The global liquefied natural gas (LNG) industry will face a supply shortfall in about five years because low prices have discouraged investment in new production, major producers said on Tuesday at a gas conference in Chiba, near Tokyo.

Without the investments, suppliers may not be able to meet the needs of buyers such as Japan - the world's biggest importer of LNG - at a time when reducing emissions from other dirtier fossil fuels will be crucial to abate global warming, executives with international gas majors said. "We are facing global overcapacity that is putting pressure on prices," Total SA Chairman and Chief Executive Office Patrick Pouyanne told the Gastech conference.

As a result, "the industry is entering a period of reduced investments … (that) could result in a lack of supply in five years. We must carry on investing for the future," he said.

LNG projects typically require billions of dollars of investment over many years of development. The industry has usually relied on long-term contracts linked to oil prices to ensure producers can get financing on favourable terms.

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That has changed in recent years as buyers led by Japan and other Asian countries have been pushing for lower prices and better contract terms. The recent drop in oil prices has also meant some planned projects are not feasible.

Chevron Corp Vice Chairman Michael Wirth said earlier at the conference a "supply gap" could happen over the next few years if new projects are not approved.

During supply shortfalls - such as when the Fukushima nuclear crisis of 2011 led to the shutdown of Japan's reactor fleet, and imports of LNG and coal spiked to records to replace the lost power generation - price can run up rapidly.

Spot LNG prices in Asia LNG-AS were at more than US$20 per million British thermal units (mmBtu) in 2014, but with the more recent surplus they are now trading at less than US$6 per mmBtu.

Other executives echoed Mr Pouyanne and Mr Wirth on the need for investments now to avoid a shortfall emerging in the early to mid-2020s.

They included Woodside Petroleum CEO Peter Coleman, who said buyers and sellers are starting to align on prices that can get projects going. "Sellers are looking for prices above $7 per mmBtu; somewhere between $7 to $8 would get most projects going, and I think also that's a sustainable level for buyers," Mr Coleman told reporters at the conference.

One seller is willing to gamble at those levels to win the chance to fill the potential supply gap.

Tellurian Inc said it will guarantee to deliver LNG to Japan for US$8 per mmBtu from 2023 under five-year contracts, including shipping. "I'm going to take the volatility out of the market,"Tellurian Chairman Charif Souki told Reuters, after announcing his offer from the stage at Gastech.

Mr Souki said deliveries would be from the company's planned Driftwood LNG terminal near St Charles in Louisiana, with the company taking care of all costs from gas field, LNG processing and delivery to Japan on an initial 7 million tonnes per annum in the "first phase".

Tellurian said on Monday it had filed an application with the U.S. Federal Energy Regulatory Commission to build a terminal that would eventually have a capacity of 26 million tonnes a year.

Gas supplies would come from a 150km link to interstate pipelines, the company said.