A Case Of Gas

MISIF wants the government to maintain gas subsidies (excerpt, emphasis added):

Steel makers oppose gas price hike, wants govt to step in

KUALA LUMPUR: Malaysia’s iron and steel makers have opposed the proposed 10% hike in natural gas prices and they want the government to stop Gas Malaysia Bhd from going ahead with it on July 1.

The Malaysian Iron and Steel Industry Federation (MISIF) said on Thursday it was “utterly disappointed and deeply concerned” with the price increase as announced.

Gas price supplied to industries would go up by RM2.03 per million British thermal unit (MMBtu). This is an increase of about 10% from RM19.77 MMBtu to RM21.80 MMBtu for industrial users, including steel producers in Peninsular Malaysia....

...MISIF said there was no justifiable reason for Gas Malaysia to increase the gas price as the international natural gas price was trading at only US$2.84/MMBtu (RM10.70/MMBtu) on the New York Mercantile Exchange (Nymex).

Moreover, the Nymex natural gas price was US$4.53 MMBtu one year ago, a drop of 37.3% year-on-year as compared to Gas Malaysia’s tariff, which increased from average tariff of RM19.32/MMBtu to RM21.80/MMBtu, an increase of 12.8%.

“This clearly shows that the domestic natural gas pricing is moving against the world trend.

As anybody who follows the global natural gas industry will know, there are massive discrepancies in gas pricing across the world. Gas prices in the US have been sub-USD3 for many years, while prices in Europe have averaged around USD8-USD12. Asia? More like USD12. That’s right, as much as four times higher, and that’s after coming down from USD15-USD16 last year. Even with the price adjustment, nearly half the price of local gas is subsidised.

Part of these price differentials is due to multiple methods of pricing gas, while another part is the dominance of long term contracts, which essentially divorce the bulk of gas actually bought and sold from spot market prices.

The biggest factor however is the heavy cost of transportation – transoceanic LNG trade requires a liquefaction plant at the point of departure, specialised gas carriers for transport, and a regassification plant at the point of arrival. The heavy capital investment involved led suppliers to demand long term relatively fixed priced contracts, which energy buyers were willing to accommodate to ensure security of supply.

The heavy capital outlay for trading LNG across oceans (land transportation is typically via pipeline, which is miles cheaper), means that its difficult to arbitrage between the regional markets. We’re not talking about shipping a bunch of bananas around. The cost of carrying LNG to Asia from America could triple the price at the buyers end – still worthwhile doing, but you have to take the 2-3 decade risk of financing and building multi-billion dollar facilities to make it happen. This is actually being done (one such facility opened this year on the US west coast), but it will take a decade or so before we see true convergence in prices.

Note that this trade/cost barrier applies even to our own LNG, which primarily comes from East Malaysia but with demand largely coming from the Peninsular. Crossing the South China Sea adds materially to the cost of gas, and given the capital outlay, we’re probably better off selling our LNG to the Japanese and Koreans.

In the meantime, referencing NYMEX prices as a guide to gas prices in Malaysia, is as meaningful as quoting the price on Mars.