Chevron: Most LNG Prices to Remain Linked to Oil

From The Wall Street Journal

By Mari Iwata

Although many Japanese natural gas buyers see a gas glut in North America as an opportunity to significantly reduce their liquefied natural gas bills, a senior Chevron Corp. CVX +1.40%executive cautioned Wednesday that plans to link LNG pricing to U.S. benchmark gas prices won’t prove to be economic for most conventional LNG projects.

“Crude-oil projects dictate the cost of LNG projects,” Chevron Gas and Midstream President Joseph Geagea told Dow Jones Newswires. “The same drilling rigs, the same engineering contractors and the same labor force [as are used in the oil industry] are used to build LNG projects.”

The connection between crude oil and LNG is reflected in the current Asian pricing benchmark for term LNG, the Japan crude cocktail, a basket of crude grades. Contracts based on the JCC have recently put the price of LNG around $18 per million British thermal units as compared with around $3.50/mmbtu for the fuel in gaseous form out of Henry Hub in Louisiana.

Most Japanese utilities have reported net losses so far in the fiscal year that began April 1, citing high fossil fuel costs. Japanese demand, especially for LNG, has surged since the March 2011 Fukushima accident, which immediately put several nuclear reactors offline and by May 2012 sidelined the entire fleet, as power companies kept them idled after maintenance shutdowns due to public safety concerns—two reactors have since been brought back online.

The Japanese government and utilities have been lobbying major LNG producers to move away from the JCC benchmark and adopt new formulas, including Henry Hub-linked pricing.

Mr. Geagea said LNG prices could only be linked to Henry Hub in places where liquefaction plant operators can buy natural gas at prices similar to the main U.S. benchmark, which was pushed below $2/mmbtu as recently as April thanks to a boom in shale-gas output.

Much of the LNG that Japanese buyers have secured in recent years—either by buying stakes in LNG projects or signing long-term contracts—will come from Australia.

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