Shell: Short Term LNG Contracts Will Be the Norm

Shell Gas & Power said on Tuesday short-term liquefied natural gas (LNG) contracts will become common within the next decade.

Shell Gas & Power President Peter de Wit said that because of the heavy cost of building the fixed infrastructure needed to deliver LNG, almost all contracts are long-term at present, but buyers are seeking flexibility.

"We could see 25 percent of contracts over time will probably become short-term contracts," de Wit said.

De Wit, who is also the director of Shell's Asia-Pacific gas business, said short-term contracts, which may last a few months up to a few years, could be common in 5-10 years time. Buyers like Korea Gas Corp (KOGAS) - the world's single largest LNG importer - want the flexibility, de Wit said.

"Buyers in Japan and Korea, where they are fully dependent on imported energy still want long-term contracts, but around those, they want to have more flexibility," de Wit said.

Industry forecasts suggest South Korea's LNG demand will jump nearly 60 percent to 25.8 million tons in 2010 from 16.2 million this year. Asia's liquefied natural gas (LNG) market is still small, at just about 75 million tons per year, and almost all sales are currently done on the basis of 10-25 years or more.

Asia's three major gas buyers - Japan, South Korea and Taiwan - are in the north while suppliers like Indonesia, Malaysia and Australia are in the south.

De Wit said Shell has ordered extra LNG tankers, including five for the Asian market, in anticipation of the need for more short-term LNG movements.

Currently, Shell ships spot LNG cargoes only to buyers mostly outside of Asia.