For instance, China’s top LNG developer, CNOOC, recently canceled talks with ExxonMobil and Shell, the owners of Australia’s Gorgon gas project. It is the second time CNOOC quit such talks in Australia because of the LNG price. In November last year, CNOOC broke off talks with Chevron for the Gorgon gas, as Chevron decided to sell gas and possibly an equity stake in Gorgon to Japan’s Chubu Electric for a price higher than it would get from China. Chevron has a 50-percent stake in the project.

Like CNOOC, PetroChina and Sinopec have talked to many suppliers but have failed to finalize deals. These failures are an indication that Chinese companies are not yet flexible when it comes to LNG price. It is not clear how much the Chinese are offering the suppliers, but when LNG prices are discussed, they are always compared with the price of coal in China. However, the suppliers prefer to peg their LNG term prices to those of crude.

In Guangdong province, it costs thermal power plants $0.021 to produce one kilowatt hour of electricity. The latest estimates show that producing that same amount of electricity from a plant fueled by LNG will cost $0.05.

At present, China has only one commercial supply contract for the 10 LNG terminals that are planned along the country’s coastal areas. That contract is between CNOOC and partners of Australia’s North West Shelf Project (NWSP). It will carry LNG to China’s first terminal in Guangdong province. The sale and purchase agreement with NWSP, signed in October 2002, has a $25/barrel cap on oil prices, which provide the basis for the LNG formula price.

The second potential contract, now in advanced talks between CNOOC and BP for importing Indonesia’s Tangguh gas, has also stumbled over some pricing issues.