Great news: Korea declares war on Woodside

Via Reuters:

South Korea’s Korea Gas Corp has entered court-administered arbitration with Australian joint venture North West Shelf Gas seeking to settle a dispute over a liquefied natural gas (LNG) contract that expired in 2016.

A spokesman for the state-run Korean firm, known as KOGAS, confirmed an arbitration process was under way but declined to give details. Woodside Petroleum, operator of the North West Shelf venture, was not immediately available for comment.

The case, to be heard in a specialist arbitration court, will be closely watched by the booming global liquefied natural gas (LNG) industry. KOGAS is the world’s second-biggest single buyer of LNG, and Australia has ambitions to overtake Qatar as the world’s biggest exporter of the fuel.

The arbitration relates to a difference over price of a mid-term supply contract, a person familiar with the matter told Reuters. The person declined to be named due to the sensitivity of the matter.

Saul Kavonic of energy consultancy Wood Mackenzie said it was “the first time in Asia” that an LNG buyer has resorted to taking an LNG price review negotiation to arbitration.

“Producers will be watching how the likes of the Chinese national oil companies, JERA (of Japan) and KOGAS choose to navigate upcoming price review opportunities, with large project value at stake,” Kavonic said.

Two sources with direct knowledge of the matter said a London arbitration court was hearing the case.

South Korea imports most of its LNG via KOGAS, the country’s sole LNG wholesaler. The firm brings in more than 30 million tonnes per year of the fuel, mainly from Qatar and Australia.

Most of Asia’s LNG is supplied via long-term contracts under which buyers receive monthly cargoes. If they cancel supplies, payment is still due under so-called “take-or-pay” clauses.

Additionally, “destination clauses” prevent buyers from selling LNG to third parties.

To protect buyers and sellers from sharp price swings, the LNG under most long-term contracts is linked to oil, which caps by how much the price for LNG can rise or fall.

But with Asian spot LNG prices LNG-AS down by half from a peak of more than $20 per million British thermal units (mmBtu) in early 2014, buyers have become restless and started demanding concessions.

There are two points to make here. The first is that despite wholesale palava to contrary, the LNG glut remains massive and growing, hence the strong-arming from KOGAS:

Second, it is most unfortunate but as Australians we must back KOGAS in this fight. Why? Because if it wins it will hit Asian LNG contract prices in the longer term as oil-linked contracts, as well as destination clauses erode. That will lower the regional gas price.

That, in turn, will drop Australia’s east coast gas prices which are delivering an huge energy shock to the economy such that gas exports are simply shifting wealth from everyone else to the gas cartel, delivering a fall in living standards to most Australians.

Sure, the producers will experience pain but that’s as it should be. It was they that mis-allocated hundreds of billions into white elephant LNG projects that export at huge losses. Everyone else in Australia should not have to pick up their tab via the cartel gouge of local markets.

Comments

  1. Horrified by your headline. Why the glee. I get that you don’t like LNG producers but the Woodside NWShelf and JV has proven a major success. Arbitration is usual avenue to determine disputes. Leave it with the courts.

    You’re transferring your frustration with aspects of East Coast LNG develoment to the West Coast, which has thus far been sensibly developed and profitably executed.

    • and woodside offsets risk to the mug punters
      Woodside Petroleum will raise $2.5 billion in new equity to help fund the acquisition of ExxonMobil’s stake in the large undeveloped Scarborough gas field.

    • Obviously it’s ironic but still the plain truth. The nation will net benefit if gas prices fall. Don’t blame me for absurd policy! You could argue that WPL was less guilty than some and a victim of sorts but my focus is national interest.

      • LNG now number two or three in terms of export revenues for Australia. This is a net benefit for the nation. That granny on the east coast can’t run her heater 24/7 is a separate issue. That a business on the east coast is penalised by high gas prices is also regrettable but it is unlikely these business will ever deliver the export good that LNG does.

      • Profitless exports dude. Net damage as the endowment is given away and locals pay the balance to keep it going.

        There is a world of difference between these exports and massively profitable coal or iron ore which is seen in the tax take.

        LNG = zero while bulks repair the Budget.

      • @Daniel – how do you figure that something that is squeezing households and business via spiking energy cost counts as a “net” benefit?

        Are you saying that government being able to point to an arbitrary figure in the form of a somewhat smaller deficit outweighs the social and economic harm that is simultaneously inflicted?

        I think you need to reveiw your concept of the term “net benefit”.

      • Net benefit in terms of trade. Many major resource projects deliver little in tax revenue for some years after inception due to various legitimate tax treatments simultaneous with bringing foreign $. This is important to the entire economy.

        The endowment is not given away, there are simply different phases in extraction and export, each with benefit. Of course, ultimately, a natural resource may be exhausted however benefit is gained via its extraction nature rather than its embedded (inert) state.

      • LOL. Not if its extracted only to the value of firm and not the nation, bud. This is not a “phase”. These projects will never pay tax given the magnitude of write-offs and depreciation to dud assets will just go on and on.

        There is one benefit to it. The export volumes are an arithmetic addition to GDP. That allows Australia to pretend everything is OK a little longer to borrow more offshore.

        But we’re talking about living standards here not GDP and the east coast bubble/cartel has wrecked the national benefits of gas exports.

        It should simply be shut.

      • We are agree to a point! The export benefit to GDP (even if arithmetic, which GDP is) is real. Australia relies on its exports to juice everything else. Sure, it may ultimately be a losers game but this is dependent on where Australians wish to invest. Property v productive income export producing industry.

        To shut down the entire sector is beyond belief. In one fell swoop you’d wipe billions off our export $, kill thousands of jobs, deeply damage our international trading and investment reputation – and all for zero gain.

        The LNG sector is what is is. Very well run on the West Coast, a few issues on the East Coast (which are slowly being managed), a large employer, an important export earner and a producer of domestic energy.

        We have to learn to love it and it not that, to live with it! A bit like a marriage.

      • Bollocks. We’s lose a few jobs on east coast and gain many more in other industries as energy prices crashed. West coast prices would soar as global prices reset and would actually see terms of trade benefits.

        The east coast LNG GDP is worse than worthless. It comes at a cost.

        You haven’t addressed any of my arguments. Just stated that GDP is good. It ain’t.

      • Thousands of jobs would be lost: production, pipelines, affiliated services. These jobs are as worthy as the other jobs that you believe will appear in other sectors should gas prices fall (perhaps more so if the other sectors are not export oriented).

        Billions in exports will be forfeited. International contracts and trade agreements trashed giving rise to prospect of sovereign risk which for a foreign capital reliant export dependent economy would be disastrous.

        Post 2020-25 holds prospect for global reset in LNG prices.

        I simply don’t agree that Australia should shut down its LNG sector. No divorce!

      • St JacquesMEMBER

        “Thousands of jobs would be lost: production, pipelines, affiliated services”
        Bwahahahaha. Are they pumping gas with hand cranks from the Bass Strait and central Oz right up to the ill conceived Queensland gas export terminals on Curtis Island? Or are you suggesting that the whole gas industry will close down if we cut back gas exports???? The number of gas related jobs is microscopic compared to the millions who work in businesses being bashed by high gas costs or indirectly by hitting their customers’ spending money.

  2. I suggest you actually take a look at what is going on in Europe. That is almost as much a factor as China. The Koreans are trying to renegotiate down and lock in lower prices while they still can. That is why this is happening. I think you are probably wrong on this one.

      • We disagree there. To me the obvious conclusion here is yours. That is the consensus and it may well be correct. Over three to five years I cannot see how a glut transpires. Shale starts dying as the refi wall hits over the next 12-24 months. That is a key item left out of most analysis. Add in China growing demand at 10-15% p.a. and Europe needing to fix their massive stuff-up. Also note where the spot market has been relative to contracted prices. That is a tighter market than the headline.