Long-term China-Malaysia gas deal may set benchmark

CHINA National Offshore Oil Corp, the country's largest player in the global natural gas market, says it has concluded a supply deal with Petronas in Malaysia which could set a new regional pricing benchmark for the resource.
Fu Chengyu, chairman and chief executive of CNOOC, said in Hamburg that it had concluded an agreement with Petronas to supply liquefied natural gas to a terminal in Shanghai.
"We have made a deal but we have not made an announcement," he said.
Mr Fu declined to comment about pricing terms, which would be the key to assessing the agreement's effect on the market in Asia for the commodity.
But he said it could become a new standard for the region if Petronas treated the deal as a benchmark.
"If they say it is a benchmark, it will be a benchmark," he said.
The Shanghai deal is the first LNG supply agreement signed by China since 2002.
This is because rising global prices for the commodity have made deals uneconomic for a local market in which the gas price is fixed.
The long delay in signing deals has been a setback for the country's once ambitious plans for LNG, a cleaner burning fuel than coal, China's traditional source of energy.
The plan included a string of at least 10 terminals along the coast, and a target to lift the share of LNG in domestic energy from zero to 8-10 per cent by the end of the decade.
The Shanghai terminal, which has been strongly supported by a city government keen to cut pollution, is scheduled to open in 2008.
Industry officials said that the CNOOC-Petronas deal had been priced at about $US5-6 per million British thermal units, above the price paid for the contracts signed by CNOOC in 2002 with Australian and Indonesia suppliers.
But the $US5-6 price is well below market price for gas delivered into north Asia, which is in the range of $US9-11.
"If it's in the range, then it has moved up somewhat from the previous deals, but it still looks pretty low," said Frank Harris of Wood Mackenzie, an energy consultancy.
LNG supply contracts are usually tied to global oil prices. The supply deals with Australia and Indonesia either had no escalation clause tied to the price of oil or they set a relatively low ceiling for any increase.
It is not clear why Petronas would agree to sell LNG to CNOOC at a price below the prevailing market rate, but it may signify a longer-term relationship between the countries.
Additional reporting:
John Thornhill