There’s a unsettling story in The Australian today about a Japanese push to break the oil-benchmarked LNG contract pricing system:
JAPAN’S drive to sever the oil link in the pricing system for liquefied natural gas could slow development of Australia’s gas industry, oil and gas company Santos has warned, saying the current pricing system was important to funding new developments.
…The Japanese move — revealed in The Australian yesterday — is linked, in part, to an extraordinary boom in shale gas in the US that has driven down gas prices in the domestic markets there.
…In Tokyo this week, Japan’s Trade Minister, Yukio Edano, told LNG suppliers a “paradigm shift” in pricing was needed to contain Japan’s soaring energy bills. He cited the growing gas demand and the linkage to soaring oil prices as the reasons for the rise. But he did not offer a clear alternative.
…But if LNG prices drop dramatically, some oil-linked contracts that underpin projects in Australia could also be renegotiated under price review clauses.
…With US domestic Henry Hub gas prices of about $US3 a gigajoule at less than one-fifth of Japanese LNG import prices, this would probably raise US prices and bring down those in Asia, where all of Australia’s LNG is bought.
Holy cow, Batman. You might recall we did the reverse to China (and Japan) when we held the pricing power in iron ore in 2007, forcing customers off long term contracts into the spot market, sending prices skyrocketing.
This is the reverse of course, with the pricing power all with the customer as new, much cheaper, supply gears up to enter the market. Yet it has the same irresistible logic.
The story also says that many of the current LNG projects are based upon the assumption of $14 per gigajoule. I sincerely hope that that is not the case.