Japan mulls calamitous LNG price cap

From the AFR today:

The prospect of a price ceiling for liquefied natural gas being set in Japan has compounded worries about mounting pressure on high-cost suppliers such as Australia.

It has also put a cloud over expectations of price increases for existing deliveries from producers such as Woodside Petroleum.

A move being considered by Japan’s powerful Ministry of Economy, Trade and Industry (METI) to extend its “Top Runner” initiative to cover LNG could set a $US13 per million British thermal unit limit on prices paid for LNG by ­utilities in Japan, the world’s largest importer of the fuel, according to Credit Suisse.

Such a price cap, which would include a requirement for prices to reduce further over time, would ­particularly hit new projects targeting the Japanese market such as Woodside’s Browse floating LNG venture and the expansion of ExxonMobil’s Papua New Guinea venture, Credit Suisse’s energy team said. The impact could also be felt by limiting price increases expected at Woodside’s Pluto project, and in price renegotiations due over the next few years by the North West Shelf venture, it added.

$13mmbtu! Here’s the cost curve for LNG:



This chart is now eighteen months old and has probably gotten worse.

There’ll be some protection for projects in their existing price contracts but if Japan puts a hard cap on LNG prices all earnings upside to these projects is gone and the late coming Queensland outfits in particular will face serious viability questions.


David Llewellyn-Smith
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  1. Mean while back in the US Henry Hub Natural Gas prices march higher towards $5.50 on cold weather and… supply constraints.

    Yes, it is yet to be seen how much of this price increase is due to cold weather demand and other cold weather effects like gas freeze offs but I suspect we are also seeing the first impacts of the rapid drop off in shale gas production once gas wells have gone into production.

    Easy fixed, just get the rigs back into the fields to drill more wells.

    Hang on a minute, at $5.50 the price is not yet high enough for most dry shale gas wells to make money. And besides most drilling rigs in the US are now chasing more economic tight oil.

    Besides I think many people in the US are starting to ask themselves seriously what the environmental consequences of shale gas is really worth.

    Bottom line, US gas prices will probably drop back below $5 once the cold weather eases but not for long. Sometime this year they are sure to march back above $5 before going even higher. I also think it should be obvious what this says about the prospects for significant exports of LNG from the US.