Surplus LNG Weakens Price Link to Oil

LNG prices and oil prices used to be closely linked in Asian markets, but increased global production capacity and the continued economic downturn are breaking that link. While crude oil futures have more than doubled since December of 2008, LNG prices linger near $7 per mBtu.

Asian utilities have historically preferred relatively expensive long- and medium-term supply contracts because their gas-fired power plants must supply uninterrupted power to run Japan’s auto factories and South Korean semiconductor units.

Banks require long-term contracts to finance LNG projects, reducing the volumes available for spot trade. This makes a contractual oil price linkage critical to projects where supplies may be costly to extract.

Thus far, 2010 has not seen any developers concluding financing for LNG facilities, though several companies had previously announced plans to approve new projects.

Increased U.S. gas supplies as well as new production capacity in the Middle East are contributing to an LNG glut, resulting in low spot prices. Consequently, some customers in Asia have sought to renegotiate oil-linked contracts for better terms.

LNG prices in Asia are usually calculated by multiplying the price of crude by a percentage which reflects the degree of correlation to crude. If the multiplier is 17 percent and the oil price is $80 then the price of LNG is about $13.6 per million Btu.

Sellers historically have asked for a multiplier of 17.3 percent. Recent contracts may have been set in the range of 14.5 percent to 15 percent, reports Bloomberg.

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