The International Political Economy of Oil and Gas by Slawomir Raszewski

Author:Slawomir Raszewski
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

The Sale of Australian LNG

A key feature of the Australian LNG industry is that due to the complexity and scale of projects, the initial investment in the project is often underwritten by long-term contracts , typically between 15 and 20 years in duration (Cassidy and Kosev 2015, p. 36). For the Australian LNG projects that were operational prior to 2014, 79 per cent of the contracted output goes to buyers in Japan under long-term gas sale and purchase agreements (United States Energy Information Administration 2016). Japanese customers are also contracted to take 35 per cent of the production from the newer projects (ibid.). China is the second-largest destination for Australian LNG , with Chinese customers taking 15 per cent of the contracted output from the pre-2014 projects, and 23 per cent from the newer projects (ibid.). The remaining LNG is either sold to other Asian buyers, including those in South Korea , Malaysia , India , Taiwan and Singapore, or held by the LNG producers as part of their own portfolio (portfolio LNG). It is estimated that only 5 to 10 per cent of Australia’s current LNG production is directly sold on a short-term basis using either spot markets or contracts of between one and four years’ duration (Cassidy and Kosev 2015, p. 38).

As there is no clear global benchmark price for LNG and there is a lack of transparency around the contracts negotiated in the sector, ‘there can often be significant differences in the price of LNG around the world’ (ibid., p. 36). Therefore, expectations around LNG exports and how contracts are priced will often reflect regional conventions. The pricing of Australian LNG exports uses the conventions adopted by the Asian LNG market , which includes the price of LNG being indexed to the Japan Customs-cleared Crude (JCC ) index (also known as the Japanese Crude Cocktail ). The JCC index is usually highly correlated to lagged price of the Brent Crude Oil benchmark (ibid.). This means that any drop in the price of oil tends to affect LNG prices between three and six months later. The LNG prices in the Australian contracts are denominated in US dollars per million British thermal units (USD/MMBtu), which reflects the price per unit of energy content.

Historically, the use of long-term contracts was attractive to Asian buyers who sought to diversify their energy market to ensure energy security . More recently, with the sharp decline in the oil price and the current oversupply of contracted LNG, there has been a shift to make the contracts more flexible and to pass on more of the pricing risk onto sellers (ibid., p. 37). For example, almost half of the Australian LNG contracted to China now benefits from flexibility in the destination clauses , meaning that the buyers may take these volumes to countries other than China in the event that they have to sell on their contracted LNG (United States Energy Information Administration 2016). Other features, which are emerging, include flexibility in take-or-pay commitments, more

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