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Will the risks of LNG spot market persist?



Sat, 27 Apr 24

Main source of the country's energy is natural gas. In addition to extraction from domestic mines, liquefied natural gas (LNG) is now imported. Over the past four years, one-third of the supplied gas has come from LNG. Gradually, the government is increasing the amount of imported gas. If oil and gas are not found in the Bay of Bengal, there is no alternative to imports. However, it is urgent to analyze the safety of the source of imports. The question arises: are we lagging behind in that area?

There are primarily two sources of imports. One is through long-term contracts, while the other is through the spot market. Currently, Bangladesh imports LNG from Qatar and Oman through long-term contracts. On the other hand, Bangladesh purchases LNG from the spot market in Singapore.

The price under long-term contracts is determined through a predetermined method. It is adjusted according to the price of oil. On the other hand, the price in the spot market or open market is determined based on demand and supply. That is, when demand increases, the price also increases. Conversely, when demand decreases, the price decreases. Following COVID-19, when the global economic downturn began, the price of LNG in the spot market increased. Then, after the conflict between Ukraine and Russia, another blow occurs. European countries refuse to take gas from Russia. This situation leads to an increase in demand for LNG in Asian countries. At that time, the price per MMBtu (unit of LNG) in the spot market rose from $6 to $7 to a peak of $56. Simultaneously, long-term contracts for LNG were signed at $12 to $13. Despite the government's efforts to prioritize long-term LNG contracts, there wasn't much progress in this regard.

Only one long-term LNG purchase agreement has been made with Oman. However, LNG supply under that agreement has not yet commenced.

Petrobangla's recent advertisement in the energy sector indicates that LNG supply over the next six months will prioritize the spot market over long-term contracts. According to Petrobangla's accounts, a total of 49 cargoes of LNG will be imported from the spot market from April to September.

In the upcoming month of April, a daily supply of 1,100 million cubic feet of LNG will be provided. Within this, 600 million cubic feet will be supplied through long-term contracts, while 500 million cubic feet will be supplied from the spot market. Additionally, in the months of May and June, a daily supply of 400 million cubic feet will come from long-term contracts, while 700 million cubic feet will come from the spot market. In the month of July, there will be a daily supply of 500 million cubic feet from long-term contracts, while 600 million cubic feet will come from the spot market. In August, there will be a supply of 600 million cubic feet from long-term contracts, and on the other hand, 500 million cubic feet will come from the spot market. In September, there will be a supply of 300 million cubic feet from long-term contracts, while 800 million cubic feet will come from the spot market. Therefore, in the next 6 months, more LNG will come from the spot market compared to long-term contracts.

Currently, the price of LNG in the spot market is slightly higher than that in long-term contracts. Petrobangla states that LNG is being purchased at $9.612 per MMBtu from the spot market. On the other hand, purchases are being made from Qatar at $10.771 per MMBtu and from Oman at $10.06 per MMBtu.

Currently, considering the price, the spot market seems to offer a bit of affordability. However, predicting how long this affordability will last amidst tensions like Iran-Israel is difficult. Additionally, during the winter season, demand for LNG increases in Western countries, causing prices in the spot market to rise. Therefore, long-term contracts for LNG are beneficial for us. They provide assurance of LNG supply and eliminate the need to purchase LNG at abnormally high prices.

Bangladesh is planning to import even larger quantities of LNG in the future. For this purpose, apart from the two existing LNG terminals in Matarbari, two more LNG terminals will be constructed. One of them will be a temporary floating LNG terminal, while the other will be a permanent LNG terminal. Already, a private company in the country has been tasked with constructing the floating LNG terminal. Discussions on the construction of a permanent LNG terminal have also progressed significantly. Land acquisition has been completed for the project. Furthermore, a term sheet has been signed with another company for the construction of another floating LNG terminal at Payra. As a result, the government plans to add at least another 1 thousand million cubic feet of LNG to the national grid within the next two years. However, the government couldn't secure a long-term contract with any major LNG supplier country to implement this plan. Recently, Amir Sheikh Tamim bin Hamad Al Thani of Qatar visited Bangladesh. There was interest from the Ministry of Energy to discuss LNG imports with Amir during his visit. However, until now, that opportunity hasn't materialized. Qatar hasn't agreed to these discussions.

Bangladesh has entered into long-term contracts for LNG supply with countries like Qatar and Oman. However, it has not been possible to make such agreements with any other country outside of these two. It may be possible to overcome this crisis through the development of relations with LNG-producing countries through long-term contracts.

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