London (Platts)--13Mar2012/422 pm EDT/2022 GMT

BP does not see natural gas prices falling in Asia or Europe as a result of LNG imports from the United States, the head of the oil major's LNG strategy group said Tuesday.

Some participants in the gas market have talked about the arbitrage opportunity to export LNG from the US, which is rich in gas from production out of shale formations, to Europe, where gas is selling at around $10/MMBtu, or to Asia, where it sells for $15/MMBtu, compared with $2/MMBtu in the US.

But Andrew Walker, head of LNG strategy at BP Group, sees "one direction" for LNG prices outside of the US: "inexorable tightening."

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Walker, speaking at the Edison Electric Institute's International Utility Conference, said the next big input into the global gas market will be a new LNG export facility being built in Australia that is due online in 2014. Even so, there is still not enough supply to meet all of Asia's demand, he said.

Despite the apparent attraction for both sellers and buyers to send cheap US gas to higher-priced markets in Europe and Asia, Walker said he did not believe there is enough interest to draw the LNG to those markets.

Potential buyers are worried about the possibility that US laws that can limit LNG exports could be triggered, disrupting supplies, Walker said. Asian buyers in particular prefer to control their supplies of gas by locking up the reserves that would be liquefied, he added. In the US that would not be the case. The gas would be coming from the market, so buyers of US LNG would be subjectto commodity risk and the price volatility that goes with it, Walker said.

Walker said BP is a firm believer in oil-gas price indexation, a view that was challenged by Peter Kreuzberg, chief commercial officer of RWE Supply and Trading, who spoke on the same panel at the London conference as Walker.

"There is no reason to index to oil," Kreuzberg said. One source of gas can be indexed to any other source of gas, even to another commodity, even milk powder, he said.

Companies such as RWE that buy gas under long-term contracts indexed to oil prices, which are rising, from supplies such as Russia's Gazprom have been at a disadvantage recently as their customers are able to find short-term supplies of gas at lower prices.

Even more important than what gas is indexed to, Kreuzberg said, are the terms and conditions of the contracts. Those contracts should have market distortion clauses that take into account lopsided markets, he argued. "The important thing from a trader's point of view is how the gas is indexed," Kreuzberg said.

But in Asia, there are few alternatives to indexing natural gas to oil, BP's Walker said. "There is no commodity price index and so no price discovery, but people are familiar with oil and they are comfortable with oil," he said.

Oil indexation also makes sense because the price of building an LNG facility is closely tied to similar costs in the oil industry, Walker said. "So as oil prices go up, so does LNG."

--Peter Maloney, peter_maloney@platts.com

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