BG sees decades more of oil-linked LNG sales

LONDON, Oct 8 (Reuters) - Liquefied natural gas (LNG) willcontinue to be benchmarked to oil prices for several moredecades, outgoing BG Group Chief Executive Frank Chapmansaid on Monday, despite complaints by top Asian importers thatsupplies are unaffordable.

Long-term, oil-indexed contracts will remain the cornerstoneof security of supply for Europe and Asia, given its growingdependence on supply from only few foreign gas-producingsources, Chapman said during a gas conference speech in London.

Chapman, who heads one of the world's biggest LNG tradingfirms, said that long-term LNG supplies will only ever be pricedagainst the fundamentals of supply and demand of gas once spotmarkets for the fuel become more liquid and transparent.

"I don't see that anywhere close in the LNG market now, andit will take decades for it to happen," he said.

"If you want a fully liquid market you must have manysources of supply and many sources of demand," Chapman said.

"You need somebody to build a merchant plant, a merchantimporter and the existence of a defined end-user that you cansell to," he said.

The LNG market is dominated by heavyweight producers Qatar,Algeria, Nigeria and Australia who predominantly fix supplies inlong-term contracts tied to oil prices.

Volumes from liquefaction plants are sold largely as part oflong-term deals, with minimal volumes reserved for spot trade ona merchant basis.

Producers have defended the practice of selling LNG linkedto oil prices amid a growing backlash by consumer countries whowant the fuel to reflect fundamentals specific to oversuppliedand comparatively cheap gas markets.

Top importer Japan amassed a record trade deficit in thefirst-half this year partly due to a surge in oil-indexed LNGimports following the closure of nuclear power plants after theFukushima disaster in March 2011.

Tokyo Gas Chief Executive of Energy SolutionsDivision Shigeru Muraki warned that LNG will have to competewith other fuels including cheap coal and oil if prices stay atcurrent high levels.

"The current price linked to oil is currently $17 (permillion British thermal units)," Muraki said, adding thatJapanese utilities will prioritize purchases of much cheaperU.S. gas exports once they come onto the market.

Booming shale gas output in the U.S. has opened up vast newreserves that companies hope to export from 2015 in the form ofLNG.

Cargoes exported from U.S. terminals would be linked tocheap domestic Henry Hub prices plus a small premium whichnevertheless is heavily discounted to prevailing global LNGprices.

Consumer countries hope that this new source of cheap LNGsupply will help to undermine existing oil-indexed pricemechanisms by making them less competitive.

(Reporting by Oleg Vukmanovic, editing by William Hardy)

((Oleg.Vukmanovic@thomsonreuters.com)(44 207 542 0014)(ReutersMessaging: oleg.vukmanovic.thomsonreuters.com@reuters.net))

Keywords: LNG BG GROUP