Denki Shimbun Interview with Dr. Fesharaki
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Article by:
Makoto Nagaoka, Denki Shimbun
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Date Published:
February 18, 2020
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Who was cited:
Fereidun Fesharaki, Chairman FGE
Interview with Fereidun Fesharaki, Chairman of FGE regarding the global situation surrounding the LNG market, and what strategies Japanese buyers can take
Risks Associated with Long-term LNG Contracts: Forecasting Supply Overhang
Currently, the LNG supply-demand situation remains weak and spot prices for Asia have been falling. According to Dr. Fereidun Fesharaki, Chairman of FGE, LNG supply from large projects, which proceeding to FID without long-term buyers, will increase massively post-2025, and the market will enter a period of extreme oversupply.
Q: The spread of COVID-19 is affecting the global economy. Any impacts on oil prices?
A: “As of now (February 1), about a $7.00/bbl price drop, of which $2.00/bbl is due to reduced Chinese oil demand and $5.00/bbl attributed to fear. It is no longer a China problem, but a global problem.”
Q: How would the US-Iran conflicts affect the oil markets?
A: “Both sides have agreed to deescalate and avoid a major confrontation. Further conflicts are possible, but chances are low. President Trump said that he will target 52 sites in Iran if Iran attacks the US troops. If the US does initiate a major attack, Iranians might declare a full-scale war. That said, we have to remember that the Iranian regime is very unpopular inside Iran. Their administration would collapse if there is a military attack. They (the Iranian government) do not want that.”
Large Losses
Q: LNG spot prices for Asia are currently falling. Any thoughts on this?
A: “Spot prices will likely remain below the long-term contract prices until 2021. Asian buyers are reselling their excess LNG volumes from their long-term contracts to Europe. Resale prices to Europe are lower than long-term contract prices, forcing Japanese buyers to incur the loss.”
Q: Future LNG supply/demand outlook?
A: “Supply surplus will continue till 2021, followed by the tight or balanced market during 2021-2025. The market will become tight or balanced from 2021 considering that incremental US supply will stop after Freeport LNG Train 3 begins commercial operations. Following this, we expect massive supply surplus post-2025, as majors such as ExxonMobil and Shell are using their own funds to develop new LNG projects without securing long-term buyers.”
Q: How will such new LNG projects, proceeding to FID without long-term buyers, impact the markets?
A: “Spot market liquidity will increase, and LNG will become a commodity. Buyers will be able to procure LNG from the spot market, without having to rely on long-term contracts. Japanese buyers have always valued long-term contracts, but these could be associated with risks in the future considering the changing environments now. A combination of 3-5 year contracts and spot procurements seem to be a practical option.”
Key Issues
Q: Any important focus on supplying countries?
A: “Qatar is planning to increase LNG production to 85 million tons, exceeding Japan’s total demand. I expect the LNG market will enter a period of massive oversupply post-2025, but the extent of supply overhang will largely depend on the progress of Qatar’s projects. Although Qatar is in a position to make a significant price cut (to sell more of its LNG), I don’t expect they will lower prices significantly. For Qatar, it would be a more realistic option to delay some of the planned trains.”
Q: JERA’s current contract with Qatar will expire in 2021. Do you think they will consider a renewal?.
A: “Even if Qatar offers a renewal of the current contract of 4 mtpa for another 15 years at DES, JERA will likely not accept the offer. JERA will probably reduce both contract volume and contract period, and procure most of the Qatari cargoes on a FOB basis so that they can increase their flexibility. This is a key issue for both Qatar and JERA.”