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  • a.dulll56 Mar 4, 2013 2:55 PM Flag

    BREAKING : Matt Chambers

    further undermines pumper "thesis"

    BP warns LNG contracts face not-so-perfect storm
    MATT CHAMBERS: March 05, 2013

    BP's chief economist has warned that existing long-term, oil-linked LNG price contracts underpinning Australia's LNG boom could come under pressure this decade as new Australian supplies move on to the market in the next few years.

    If combined with other uncertain factors such as US exports and a Russian gas pipeline to China in the next couple of years, Asia could quickly find itself facing the same factors that led to a dramatic change in the way European gas was priced, BP chief economist Christof Ruhl said yesterday.

    If that happened in Asia to the extent spot LNG prices were a lot cheaper than oil-linked prices, there would be pressure to redo contracts.

    "If the Australian contracts are coming on and you have US exports at the same time and the global economic recovery is not too strong you will have a lot of LNG coming to Asia," Mr Ruhl said.

    He said that if this combined with a Russian gas pipeline into China -- which is stalled over price negotiations but could become reality if falling oil prices hit Russian export revenue and force a compromise -- and deregulation of the Japanese power sector, prices and pricing systems would come under pressure.

    "If that happens, and I'm not saying it will, you have the same line-up of factors that eroded the oil-linkage in Europe becoming active in Asia," Mr Ruhl said in Sydney yesterday.
    "Clearly, the risks are more towards things changing than remaining the same."

    Australian LNG suppliers are currently building $180 billion worth of LNG projects in a massive drive that will make the nation the world's biggest exporter of the fuel. They have underpinned their investment with long-term contracts linked to the price of oil.

    Japan, the world's biggest export buyer, has been pushing to link prices to cheaper gas in the US, where the shale revolution has turned a shortage into a glut and has most pundits forecasting the US will become a substantial exporter.

    Australian companies have said their existing contracts will remain, but Mr Ruhl said they could not be held as certain. "Normally in times of change, contracts are maintained as long as possible and then, typically, if it gets completely out of fact with the real world you'll see some renegotiations going on," he said.

    "It depends on contracts and clauses in specific contracts, but . . . often times there is space for renegotiations if contracts seriously get out of sync with what happens in the rest of the world."

    Most observers see the Japanese utilities as considering themselves bound by their contracts, but many are less confident about the potential behaviour of Chinese state-owned buyers.

    Mr Ruhl said BP believed that in the next four or five years the odds were weighted towards declining, not rising, prices of both oil and gas.

    Sentiment: Strong Sell

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