Asia-Pacific LNG projects face tough sales battle

Asia-Pacific LNG projects face tough sales battle

Michelle Nichols and Cameron Dueck, Reuters, Melbourne/Singapore

Malaysia's state oil firm Petronas has almost completed a new US$1.5 billion plant to compress and cool natural gas for export, but faces a tough battle with other Asian producers to secure buyers.

With the first phase of the expansion at the Bintulu complex to come onstream in about a month, Petronas has sold less than half of the liquefied natural gas (LNG) the plant will be able to produce.

Petronas is expanding its Bintulu LNG complex in Sarawak state by nearly seven million tons per year to about 23 million tons per year to create the world's largest LNG complex.

"Obviously we are still looking for further contracts. If you have a certain amount of capacity left, you try to sign contracts for it," said a Petronas source.

There are millions of tons of new production capacity planned in Asia-Pacific, and marketers are in a pitched battle for long- term sales contracts.

Although gas demand is rising in Asia, the region has sizable gas reserves and many undeveloped gas fields that all aim to begin production in the next decade and are competing for the same limited list of customers.

Regional producers are also competing against supplies from the Middle East and Russia's mammoth Sakhalin-1 and Sakhalin-2 projects, which plan to begin exporting gas within five years.

This has put buyers in a favorable negotiating position as they push sellers to agree to more flexible terms.

Supply contracts of 10 to 20 years have traditionally formed the foundation of the region's LNG industry, helping to fund new plant construction and secure steady revenues.

"There is a lot of talk of this being a buyers' market in the medium to longer term based on the new projects coming up. They're (producers) all having trouble signing deals for their gas," said Andy Flower, an independent London-based gas analyst and formerly BP's LNG director.

Planned LNG plants in Malaysia, Australia and Indonesia hinged on hopes for rapid demand growth in new markets such as China and India as well as increased demand from traditional regional heavyweights Japan and South Korea.

A report by the law firm Linklaters in Hong Kong said about 11 million tons per year of production capacity was under construction in Asia-Pacific, adding to the 61 million tons per year of the super-cooled, pressurized natural gas already being produced.

Total LNG demand in the key importers or potential buyers South Korea, Taiwan, Japan, China, India and the Philippines is expected to more than double to 197.6 million tons in 2015 from 74.5 million tons in 2000, said Australian analysts ACIL Tasman Consulting.

"You might think it's a buyers' market today, but it could be a sellers' paradise in a few years' time," said Arthur Dixon, president of the North West Shelf's marketing arm Australia LNG.

South Korea, Japan and Taiwan import about 70 percent of the world's LNG. However, with future demand growth from traditional buyers expected to slow, sellers are increasingly eying new buyers to underwrite plant construction.

The most important new market is China, which has already signed two import contracts totaling about six million tons per year and is expected to sign further supply deals.

India has two LNG terminals under construction, while the dozen other terminals on the drawing board are on hold as investors doubt India's ability to pay for the gas.

Some producers, such as Indonesia, the world's largest LNG producer, are eying the U.S. West Coast market. State oil company Pertamina plans to sell gas from its undeveloped Donggi field in Central Sulawesi to the United States.

Accessing the United States, the world's largest gas consumer, could mean additional contracts for Asia-Pacific LNG projects, but plans for the first West Coast LNG terminal have yet to come to fruition. Security and environmental concerns have stalled construction of such a plant.

Analysts say the declining cost of building an LNG train has prompted larger plants and greater capacity for planned projects.

Indonesia has repeatedly sent officials to Japan to seek buyers to support its planned seven million tons per year Tangguh plant in remote Papua province.

So far the BP Plc-led project has a 2.6 million tons per year deal with a terminal in China's Fujian province starting in 2007, and BP is also considering an import terminal in West Java to take LNG from the project.

Pertamina is seeking a partner to build another three million tpy LNG production plant at its Bontang project in East Kalimantan.

In Australia, Woodside Petroleum Ltd's Greater Sunrise field in the Timor Sea and ChevronTexaco-led Greater Gorgon field off Western Australia state both hope to be selling gas to Asian buyers by the end of the decade.

"It's a crowded market place out there right now. But in our view the long-term projections for LNG are very bright," said Peter Glass, marketing manager for ChevronTexaco Australia.

North West Shelf, Australia's largest LNG exporting center, is expanding to 11.7 million tpy from 7.5 million by end-2004, with further expansions planned to serve a hotly contested Chinese supply contract it won last year.