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DOE fleshing out LNG pricing and contracting for PH

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By Myrna M.Velasco

With help from the shale gas-swamped United States, the Department of Energy (DOE) has started fleshing out the pricing matrix for liquefied natural gas (LNG), as this sector builds up capacity for the country’s future energy mix.

Energy Secretary Alfonso G. Cusi

Energy Secretary Alfonso G. Cusi

To equip itself with the requisite knowledge on project structures as well financial modeling on LNG projects, the DOE has engaged the assistance of the US Department of Commerce-Commercial Law Department Program, law firm Latham and Watkins and the University of the Philippines-Gas Policy Development Project on a three-day training that tackled project implementation parameters for the gas sector.

Key points of discussion had been on project structures and contracting arrangements, costing and pricing mechanisms, project valuation, budget analysis and financial modeling.

Energy Secretary Alfonso G. Cusi asserted “it is high time for us to intensify our effort in realizing our aspirations to develop our natural gas industry and transform the country as a regional LNG hub.”

The energy chief has ambitious take on positioning the country as “LNG hub”, but his concept differs a bit as this just primarily delves on turning some Philippine ports a transshipment point of LNG commodities being delivered to other countries – not the true-to -form LNG hub wherein buyers and sellers could actually trade or execute transactions for gas.

LNG pricing, in particular, is the major puzzle that investors have yet to fully comprehend in the Philippine gas investment re-set, especially with the emergence of regional hubs that has been taking gas pricing away from its traditional linkage with oil.

In fact, for investor like First Gen Corporation which is both into putting up its LNG import facility and new LNG-fired power projects, it is looking at a pricing frame that will be coal-indexed, so it could be assured of a competitive place in the Philippine energy mix.

On LNG contracting, investors are similarly looking at a combination of short- to long-term contracts as well as some degree of reliance on spot procurements – which is a diversion from the long-term gas sale and purchase agreements (GSPAs) that reigned in the era of the Malampaya gas-to-power project.

In current contracts, price review and ‘exit’ or termination clauses are becoming mandatory provisions in the buying and selling of liquefied natural gas –hence, these are crucial concerns needing extensive study and re-assessments for markets freshly taking plunge into LNG investments.

On LNG supply contracting, market players reckoned that ‘flexibility’ is key for project developers initially navigating a terrain for short-term contracts but they must also have strategies to eventually replace them with long-term contracts.

Experienced LNG buyers know that new supply projects don’t get built without long-term contracts to support them, hence, the savvy gas purchasers pursue strategies of rationing the long-term portion of their portfolio for greenfield supply contracts, while they sign shorter term contracts with portfolio players.

As noted further, there are multiple ways of doing this and it just requires a new approach – especially so since in a well-supplied market, there is tendency for sellers to compete aggressively on price even at the cost of a risk-adjusted negative return. But such has not been seen sustainable because ultimately, operational and credit risk factors need to be accounted for, it is for this reason that sellers in this market-transforming gas environment need to figure out ways to compete more than just on price.

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