Asia's long-term LNG contracts to remain linked to oil: Santos VP

Kuala Lumpur (Platts)--7 Jun 2011 526 am EDT/926 GMT

Asia's need for secure energy supplies from nearby sources will keep most regional liquefied natural gas volumes tied up in long-term contracts linked to the price of oil for the "foreseeable future," Santos Vice President, Strategy and Corporate Development, Peter Cleary said Tuesday.

"I strongly believe that convergence of the various regional hub prices is still some time away," Cleary said in a speech at the 16th Asia Oil and Gas Conference in Kuala Lumpur, Malaysia.

"Oil-linked pricing has worked in Asia because buyers are comfortable that oil is an established, well-understood and globally traded commodity... Producers also support oil-linked pricing, (because) strong prices are required to underpin new projects," he said. "Oil-linked pricing of LNG has been the commercial driver required to build real scale and tackle challenging gas developments."

Nevertheless, the way LNG is traded has been changing rapidly, with the spot and short-term market now accounting for around 20% of all LNG volumes.

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"The volume, depth and liquidity of the short term market give project proponents the confidence to proceed with LNG supply projects without the need to lock in long-term customers for their entire output," Cleary said.

On the buyer side, the development of spot and short term trades have been helpful to Asian buyers as a more flexible to balance demand and supply.

"However, I do not believe that buyers will be comfortable with a total reliance on short-term supply. For security of supply reasons, we believe buyers will continue to look for long-term contracts to meet the majority of their needs," Cleary said.

Currently, short term sales typically go to the traditional established buyers in Japan, South Korea and Taiwan, while spot sales flow to the highest netback market, generally in North and Southeast Asia, Cleary said.

Santos recently began construction of its $16 billion Gladstone LNG plant on Curtis Island off Queensland.

Santos and its partners made their final investment decision on the $16 billion 7.8 million mt/year project in January. First shipments from the two-train projects are slated for 2015.

Both South Korea's Kogas and Malaysia's Petronas have signed 20-year offtake agreements.

Santos holds a 30% stake in the GLNG project with France's Total (27.5%), Malaysia's Petronas (27.5%) and Kogas (15%).

--Thomas Hogue,

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