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US seeks more global LNG sources

Asia-Pacific gas sellers will have to become more flexible to win a foothold in the huge US market, despite 20 years of gas supplies at fixed prices that have made loyal customers of energy importers such as Japan.

US gas demand is eight times the size of Japan's, the world's biggest buyer of liquefied natural gas (LNG), and forecasts of strong growth in consumption are forcing the US to consider gas sources further afield.

Gas-rich Asia is looking for a slice of the American market, but it will have to adopt more nimble contract and pricing methods to get into the freewheeling US market than traditional regional buyers have required.

"The supplier or producers will have to take into account the new demand scenario," said Hassan Marican, president and chief executive of Malaysia's state-owned Petronas.

Seeking flexibility

"Customers look at flexibility and suppliers will have to adapt to this," he told Reuters by telephone from Kuala Lumpur.

The Asia-Pacific LNG market accounted for over half of the world's exports and nearly three quarters of imports in 2000, with most of that business done on an inter-regional basis under long term deals.

Occasional spot cargoes, about 10 per year, now head to North America from Asian shores, but firms want to create a regular flow of LNG to the west coasts of the US and Mexico.

"We've been in talks with several importers of LNG to move cargoes to the United States as and when they become available and the economics work out," Marican said.

Benefits for South America

South America is likely to cash in on strong growth in US natural gas demand, which BP recently forecast at 2 percent per year. The International Energy Agency pegged US demand in 2000 at 644.3 billion cubic meters with imports at 107.0 billion cubic meters.

Most US gas needs are served by pipeline. LNG imports -- mostly from Trinidad, the Middle East and Africa -- accounted for only one percent of total domestic gas consumption in 2000.

Asian suppliers also are expected to leverage easy access to the US West Coast, where a handful of LNG receiving terminals are on the drawing board for the next decade.

This demand is expected to help drive development projects in Australia, Indonesia and Malaysia, Asia-Pacific's major LNG suppliers.

"Access to a deep and liquid market should have an immediate and positive impact on the Asia Pacific market," said Allyn Risley, president of global LNG at Phillips Petroleum Co.

Royal Dutch/Shell last month announced plans to build a US$500 million LNG receiving plant in Western Mexico to serve markets in Mexico and California by 2006.

The company plans to import about 7.5 million tonnes per year (tpy) of LNG from Asia-Pacific.

"We don't believe there is a large of amount of low cost domestic gas in the US that is able to exhaust domestic demand, and as a consequence, there is a role for Asian LNG in that market," said Roger Bounds, head of Asia LNG supply at Shell.

Bounds said the Mexican terminal could be supplied by any of Shell's gas projects in Australia, Malaysia, Brunei, Russia's Sakhalin island, or a planned floating LNG plant in the Timor Sea.

Shell and Phillips remain in discussions over development of the Timor Sea project.

El Paso and Phillips

El Paso Corp and Phillips also are planning a receiving plant on the west coast of Mexico, just across the US border from San Diego. The plant will have a capacity of some 5 million tpy and is targeted to begin operations in in 2005 or 2006.

El Paso, which also is considering an LNG plant off the coast of California, signed a deal in January with Indonesia's state oil company, Pertamina, to explore opportunities for shipping LNG to the US.

"Indonesia is one of the potential suppliers, but we're also talking to Petronas and people in Australia," said David Bradley, senior vice president of El Paso's Asian LNG supply, who added that supplies also could be sourced from South America.

US demand will add a new element to a market that has until now been dominated by North Asian buyers.

"The Japanese and [South] Korean buyers have essentially dominated the market until now. But now there could be an alternative, and that will be Mexico and the West Coast of the USA," Shell's Bounds said.

Relationship-based contracts

Regional Asia-Pacific LNG business has traditionally existed under long-term agreements of 20 years or more giving supplier and consumer security in the market.

"Contracts with US buyers will be shaped by US law, while the Japanese and the Koreans look for more relationship-based contracts. That's going to be a new challenge for the region as a whole," said Bounds.

Cargoes crossing the Pacific could be priced on a netback from the local market with US gas futures used for hedging. Most Asian LNG trade is priced on netbacks off North Asian markets and linked to an oil price indicator, Bounds said. While US buyers may prefer short to medium-term contracts, long-term deals will remain the backbone of the Asia-Pacific market with North Asia the major buyer, analysts said.

However, Peter Best, oil and gas analyst at CSFB in Hong Kong, said US demand may speed up the slow trend towards more flexible terms and spot trade by merchant players.

"The entry of activity by merchant players would promote the emergence of a more fluid market," Best said.
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