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Asian LNG spot buying to remain demand-driven in 2010

By Hong Chou Hui

May 20 - Spot LNG purchases by Asian importers will continue to be driven by demand for the rest of 2010, despite a supply overhang keeping a lid on prices, analysts and market sources surveyed by Platts said this week.

The region's importers Japan, South Korea, Taiwan, China and India between them have the capacity to import 200 spot LNG cargoes a month.

The key factors impacting spot LNG markets this year will remain oversupply, buyers exercising downward quantity tolerance or DQT clauses in their long-term contracts, and the severity of the winter, sources said. DQTs allow LNG buyers to reduce or increase term deliveries by 5-10% of contracted volumes for a specific year.

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"The price differential between spot and term cargoes remains very wide so I would expect all buyers to apply DQTs and leave room for some spot cargoes," said Tony Regan, principal consultant at Singapore-based energy consultancy Tri-Zen.

"South Korea has always contracted less than it needs, to leave room for a significant spot tranche and Japan seemed to be trying to do the same last year," Regan noted.

Meanwhile, since Taiwan started up a second LNG import and regasification terminal at Taichung with a capacity of 3 million mt/year in April 2009, it can take in more LNG, Regan said.

"But I don't expect any of these to be significant spot buyers over the next few months," Regan added, referring to all the Asian importers.

Cut in term imports to add to spot volumes

The global LNG market would have seen oversupply and depressed prices this year even if buyers had not exercised DQT clauses, said Chris Holmes, vice-president at consultancy Purvin & Gertz.

"Obviously, if DQT is exercised, then these volumes will probably appear as spot supply, with the result that even more volume is available for spot trade," said Holmes. "This will lead to higher spot demand as a lower proportion of demand will be covered by term supply."

So far this year, Asian spot LNG buying has been muted, Tri-Zen's Regan pointed out. "Asia is not taking more [spot LNG] and the region's first quarter imports this year were the same as Q1 2009," he said.

"We might see a few spot cargoes traded in Asia in Q2, a few more in Q3, and perhaps around 20 in Q4. But if it's a mild winter, then we may not hit that level," Regan added.

India could be an active spot LNG buyer if it continues to suffer bouts of disruption in domestic gas supply, Holmes said. The country often turns to the spot market in the event of major disruptions in domestic production.

India's Petronet LNG, which currently receives 7.5 million mt/year of term supplies from Qatar's RasGas, has the capacity to import up to 11.5 million mt/year at its Dahej terminal on the west coast. However, the excess capacity is unlikely to be utilized in the face of competing supplies from Reliance Industries Limited's giant D6 project of the country's east coast, a senior Petronet official told Platts in March.

The price of Reliance's D6 gas, which came on stream in April 2009, has been fixed at $4.20/MMBtu for the first five years. That translates to around $6.75/MMBtu at the customer gate in the demand centers of western and northern India, the rate imported LNG needs to compete with after including import taxes, regasification costs, and pipeline transmission charges.

D6 output currently averages 60-63 million cu m/day (2.12-2.2 Bcf/d) and is expected to rise to 80 million cu m/d late this year.

Shell, the other LNG importer in India, runs a 3.6 million mt/year terminal at Hazira on a merchant model, buying spot cargoes as and when it lines up a buyer.

Japan import capacity exceeds demand

Japan, the biggest consumer in Asia, has historically had far more LNG import capacity than demand, and can currently import 166 cargoes a month, according to Regan.

Japan's second-largest city gas supplier, Osaka Gas, plans to use contract flexibility to cut down its term imports to match demand expectations in fiscal 2010-2011, a company official said in early April.

The country's second-largest power utility Kansai Electric may also use the flexibility clauses to reduce contractual import volumes in the current fiscal year despite signs that demand is recovering, senior company officials told Platts in late March.

Japan's 10 major power utilities consumed 20.68 million mt of LNG over the October-March period, up 2.6% from a year ago, on the back of a gradual recovery in industrial demand for electricity. The utilities bought 21.53 million mt of LNG in the six-month period, an increase of 4% from a year ago.

The region's second largest spot import capacity is with South Korea, which can bring in 24 LNG cargoes monthly. "Korea won't use its capacity unless it needs to," said Holmes, adding that the country could buy some spot LNG in summer for use in winter.

"Korea has considerable seasonality in gas demand so it has developed import capacity to meet seasonal winter demand peaks," Regan said.

Korea Gas Corporation, the world's single largest importer of LNG, generally has more demand for the winter months, and imports spot cargoes as when required, said John Harris, director at consultancy IHS CERA.

Taiwan could be looking to import two spot cargoes every month to utilize some spare import capacity at the 7.44 million mt/year Yung An terminal, a source close to the country's sole importer, CPC Corporation, said in mid-April.

CPC bought four spot cargoes from Russia's Sakhalin and Australia's North West Shelf in early April for around $5.30-5.50/MMBtu, with two cargoes for May delivery and two for June, the source added.

"Taiwan's demand is healthier as Taipower has delayed the start-up of two new nuclear reactors," Holmes said.

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