Malaysia calls for different LNG pricing

Malaysia calls for an ecological premium to be incorporated into future contracts for LNG to reflect its status as a clean fuel requiring huge up-front development costs. "We need to give value to gas as an environmentally friendly fuel," Hassan Marican, president of Malaysia's state oil company Petronas, told. Hassan said he was not urging a renegotiation of current long-term contracts, only that future deals take LNG's status as a clean fuel into account.
Developing plants and tankers to ship LNG around Asia was much more costly than the relatively simpler pipeline technology used in North America and Europe, he said. "I totally agree," the newly-elected SPE President DeAnn Craig said, who added that coal, while cheaper, creates twice as much carbon dioxide emissions as LNG. Environmental ministers will be debating possible caps on carbon dioxide emissions at a meeting in Kyodo later this year.
In his opening address to the conference, Hassan said a balanced solution needed to be found on a price formula for LNG that is acceptable to both buyers and sellers. "A compromised win-win solution is needed," he said.
The development of new grass roots LNG projects require advanced long-term planning on technology and commerciality in pacts between gas producers, sellers and buyers, he said. "While progress has been made on the technology front, there has not been any common approach to finding a solution on the commercial front, particularly the price issue," he said. "The cost of exploiting and developing gas resources has been escalating but gas prices have not kept pace with this increase. In fact, gas prices in real terms, have actually decreased," Hassan said.
LNG prices are now determined under a "crude cocktail" based on the price of various kinds of crudes in Japan. Although oil demand is projected to continue to grow in absolute terms, the increased utilisation of gas is expected to reduce oil's share in the energy mix. The petroleum industry has to contend with the problem of balancing lower oil prices with ever-increasing development and operating costs, Hassan said. "Adding to the impending supply crunch is the region's maturing acreages and decreasing prospectivity. Exploration activities have resulted in new discoveries but these are usually smaller and thus more expensive to develop." Increased domestic use in big Asian producers such as Malaysia and Indonesia have diverted exports to the home markets, he added.
The region's gas reserves of 341 tcf are expected to last 47 years. Malaysia has the largest proven gas reserves in Asia with 68 tcf.