--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Dec 5 (Reuters) - The Asian liquefied natural gas buyers' meeting this week to seek ways of getting cheaper supplies would do well to look closely at the issues facing Santos Ltd's Australian project.
It is perfectly normal for top buyers Japan, South Korea, China, India and Taiwan to try and secure the best possible deals for LNG, but this desire quickly runs headlong into some uncomfortable realities.
The importers of the super-cooled fuel are holding talks in New Delhi to look at ways of lowering Asia's natural gas costs closer to those in the United States and Europe.
This nascent buyers' club will look at pressing for an end to oil-linked pricing for LNG, scrapping destination clauses in sales contracts and generally making the market more liquid and transparent.
All this sounds reasonable, especially from buyers that are fed up paying prices that are multiples of those enjoyed in other regions.
The current spot price of LNG in Asia is $18.85 per million British thermal units (mmBtu), while front-month natural gas in the United States closed Dec. 4 at $3.96 per mmBtu and U.K. benchmark gas was the equivalent of $11.90 per mmBtu.
Obviously the Asian price includes the cost of liquefaction, which is round $5-6 per mmBtu, and freight, but even accounting for those gas supplies are still far cheaper in other regions.
Are the buyers' hopes of securing cheaper LNG realistic if they do manage to present a united front to suppliers?
The reality is that buyers only enjoy market power when there is a surplus of product, something that doesn't exist in LNG in Asia, or where producers are making excessive profits.
While there is the general expectation that the wave of new supply coming on stream in the next three to four years will drive the market to surplus, there are reasons to be sceptical that this will be a long-term structural change.
The issues revealed by Santos at an investor briefing on Dec. 4 are a case in point.
Santos, Australia's second-biggest oil and gas company, said it would have to spend more than $1 billion in additional costs to ensure enough gas for its $18.5 billion coal-seam gas-to-LNG plant at Gladstone (GLNG) on the country's east coast.
Santos needs more gas to feed the plant, and while the company said it would deliver its first cargo in 2015, it also said the ramp-up to full production would take longer than anticipated.
Santos owns 30 percent of the project, while Malaysia's Petronas and Total own 27.5 percent each. GLNG has binding offtake agreements with both Petronas and South Korea's KOGAS for 3.5 million tonnes per annum over 20 years.
However, the LNG costs are now going to be higher than anticipated and this will impact on the project's returns.
What the Santos project shows is that LNG which the market thought was locked into the supply chain is perhaps not quite as secure as thought.
LNG COST ESCALATION
Santos's issues won't necessarily be replicated at the two other coal-seam gas projects in eastern Australia, but a common theme among the new LNG projects is that they are experiencing cost overruns.
Given that these are multi-billion ventures, with the bill for Chevron Corp's conventional project off Western Australia state topping $50 billion, developers will be reluctant to grant lower prices just because buyers ask for them.
The east of Suez LNG market may move into a small surplus in 2017 and stay there for several years, according to consultants Facts Global Energy (FGE).
To remain in surplus, though, new supplies are needed from the United States, Canada and Mozambique, FGE data show.
Here's the problem for Asian buyers: If they are successful in driving down prices, then the projects that would deliver new supply to maintain the surplus likely won't be built.
This is especially true for Canada and Mozambique, where financing for projects will be hard to secure if there isn't the certainty of high prices.
It's also true for U.S. LNG exports based on shale gas as the costs will escalate dramatically for those projects if they have to start from scratch. Projects underway now are converting existing import terminals to export facilities.
This leads to the risk that the meeting of buyers is not much more than a public relations campaign that will achieve little beyond media headlines.
It's hard to see disparate companies in countries with different business cultures and different energy supply/security needs finding enough common ground to present an effective united front to sellers.
It's also hard to see a viable spot market emerging in LNG, given the nature of the fuel.
LNG is costly to store and the longer it is stored the more gas escapes through burn-off. An effective trading hub would likely need to be able to capture the burn-off and re-liquefy the gas, all of which adds to complexity and costs.
It still seems that the best alternative for LNG buyers is to continue down the path of becoming junior partners in developing new supplies.
The only other alternative would be to stop using as much natural gas and rely on other energy forms, such as coal and nuclear.