Drewry warning over rising LNG costs

The LNG Freight Index gained 20% in December, but short-term rates were still 4% below what they were in December 2011.

According to Drewry, the biggest worry is Japan, where rising prices are prompting the government to reconsider its nuclear policy and restart its offline nuclear power plants.

The delivered price of LNG to Japan remains at almost double the price in Europe and almost four times that of Henry Hub day-ahead prices. Drewry says: “This could be disastrous for the LNG industry at a time when 23 new vessel deliveries are expected and not much liquefaction capacity is being added. Such a shift would quickly puncture the recovery for LNG operators.”

It says that LNG supply was tight in 2012 as gas supply dwindled and liquefaction plants suffered a number of planned and unplanned shutdowns or reduced their supply and that this is expected to continue until Australian and US export projects come to fruition.

The position in the US is better because it’s experiencing an overflow of gas to the domestic market, meaning historically low gas prices and a huge reduction in imports, which is unlikely to change. Demand in Europe is lower however, with many countries relying on pipeline supply.

Rising prices and an increasing disparity between Atlantic Basin and Pacific Basin prices are apparently leading to louder calls from Asian buyers wanting a pricing reform, Drewry says.