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Old guard calls foul on sweeter LNG deals

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LNG Industry,

According to the latest report by Bloomberg, buyers in the world’s largest LNG markets are concerned that newcomers are winning better deals than traditional customers who helped underwrite the industry.

New importers in the Middle East and South Asia could be getting cheaper LNG than established users in North Asia. Sellers may be sweetening deals to lock up fresh customers as new projects, made possible partly by long-term commitments from buyers in countries including Japan and South Korea, flood the market.

To raise the money needed to build an LNG project, developers have traditionally needed to find both large natural gas resources as well buyers willing to commit to purchase contracts that can last more than 20 years. Jera’s wariness over how new importers are being courted highlights the growing pressure on sellers trying to manage old relationships while winning new customers amid the oversupply of capacity that has tilted the seaborne gas market in favour of buyers.

Many Japanese customers and other big buyers signed supply deals between 2012 and 2014 when prices were at their peak. Those contracts require them to buy gas at a higher percentage of the price of crude – known as oil indexation – than newer agreements.

Last year, Pakistan State Oil Co. agreed to import LNG from Qatar at 13.4% of the price of oil, while Japan’s Chubu Electric Power Co., Kansai Electric Power Co. and Tokyo Electric Power Co. Holdings Inc. all reached deals in 2012 with the country at a price 14.9% of oil.

Spot LNG in Northeast Asia has fallen from nearly US$20 per million British thermal units in early 2014 to US$5.65 as of last week.

As demand in a traditional buyer like Japan is seen falling as more renewable power comes online and nuclear plants restart, gas producers are focusing on emerging markets and new importers to soak up a coming flood of supply. Beyond offering cheap prices to new LNG entrants, sellers are also seeking ways to create even more customers by encouraging projects that spur the fuel’s use.

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