LNG prices may tumble to as low as $0.70

<b><font size="4">MMBtu</b></font>

12/04/2009 00:00 AST

LNG prices have fallen to a-sixth of their value since their $25/MMBtu peak price in summer last year, market feedbacks indicate.

In a report titled Swimming in natural gas, Francisco Blanch, the famed Merrill Lynch energy analyst, said the supply of the clean fuel may outstrip its demand manifold this summer further plummeting its price to $0.70/MMBtu.

The lack of an Opec-style organisation has allowed a free-fall of LNG prices, market insiders said.

With several LNG suppliers pricing their produce on long-term contracts, which are linked to the oil prices, it is the spot prices that have actually suffered, other analysts said.

"Only 12 months ago LNG demand seemed insatiable, with Asian and European consumers soaking up any available spot cargoes. As the market overheated last summer, spot LNG prices hit record highs of $25/MMBtu. Since then, the LNG market has tumbled, with spot prices in Asia now trading in a $3.80-5.00/MMBtu range," Blanch wrote in his report.

But then its primarily the spot prices that account for about 10 per cent of the export for LNG exporters like Qatar that is suffering, Richard Savage, head of energy research at London -ased Mirabaud Securities said.

"The US has had a seven -er cent growth in LNG production capacity this year primarily from coal bead methane sources. So one of the biggest consumers does not require additional LNG," Savage said.

LNG producers are feeling the need for an Opec-style organisation, Savage said. "Oils free-fall has been contained by Opecs cuts. Similar steps could have worked for LNG."

Blanch said the LNG producers may be forced to shut capacity this summer. "The downturn in the global economy means this capacity (existing LNG production capacity) is not needed at present. But a shut-in of LNG liquefaction capacity looks unlikely. Instead, we see the need to reduce high cost natural gas production in consuming regions," he said.

Spot prices of $0.70/MMBtu may be happily accepted by producers as production costs are even lower. Blanch said. "On our estimates, LNG producers will accept netbacks as low as $0.70/MMBtu, suggesting that UK NBP or US NYMEX natural gas prices would have to go to $2.50/MMbtu or below before we see LNG liquefaction shut-ins. This is because variable LNG production costs range between $0.50-2.00/MMBtu, despite billions of dollars required in upfront investment," he wrote in his report.

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