Peru LNG revenues decline on increased Henry Hub exposure

30 April 2014 23:11 Source:ICIS

The Peru LNG consortium, which manages South America’s only existing LNG export facility, reported a decline in revenues over the first quarter of this year as a result of an increased exposure to LNG sales priced on an indexation to the US Henry Hub natural gas benchmark.

Peru LNG SRL, the company which operates the Peru LNG facility, reported revenues of $269m over the first quarter of 2014, down 37% from the same period in 2013. Peru LNG’s stakeholders are US-based Hunt Oil, Korea’s SK Corp, Shell and Japanese trading company Marubeni.

But despite the decline, Peru LNG’s overall balance sheet was relatively unaffected with net income up 15% from 2013. The company buys gas from upstream producers at a price based on the cost of the final LNG cargo, and thus was able to pass on the reduced sales revenues to its suppliers.

The revenue markdown is the result of a contractual shift, through which terminal offtaker Anglo Dutch major Shell delivered a higher proportion of Peru’s LNG cargoes to Mexico’s Pacific coast Manzanillo terminal between January and March.

Ten of the 15 cargoes produced at the Peruvian Pampa Melchorita facility over the first three months of 2014 were sent to Mexico, according to data from Peru’s state hydrocarbons regulator Perupetro. This compares with just six of the 15 cargoes produced over the first quarter of 2013.

Shell completed the acquisition of the Peru LNG offtake contract and an equity stake in the terminal in December 2013 as part of a $6bn transaction with Spanish oil and gas producer Repsol.

Under the terms of the contract originally signed between Repsol and Mexico’s state utility CFE in 2007, deliveries to Mexico from Peru would increase from one cargo a month in the first year of the contract to two and three cargoes a month in the second and third year respectively.

These deliveries are priced at 91% of the US NYMEX Henry Hub front-month contract price. As a result, Peruvian volumes have been delivered to Manzanillo at prices no higher than $4.50/MMBtu at the same time that cargoes have been sent to Asian markets such as Japan at almost four times the price, according to the front-month ICIS East Asian Index (EAX) spot price assessment.

Efforts for change

This price differential has led to public criticism of the CFE contract within Peru, and authorities from the South American country have spoken of their desire to renegotiate the terms of the deal.

Delegations from the governments of Peru and Mexico were understood to have discussed potential changes to the contract last year. Options on the table included amending the contract through a price increase, or reducing the volumes delivered to Mexico from Peru and thus enabling Shell to divert cargoes to more lucrative markets.

Shell is also understood to have the option to substitute Peruvian volumes for alternative natural gas supplies into Mexico. This potentially gives the European major the flexibility to replace Peruvian cargoes for LNG sourced from other supply points, or even natural gas via pipeline from the US.

As of yet however, no contractual amendment has been agreed. Americas-based sources say that Shell has shown little inclination to consider alternative supply options for Mexico.

Mexico’s finely balanced gas supply situation also means that the country’s government is unlikely to welcome changes to the Peru LNG supply contract, at least in the short term.

Soaring industrial and power sector demand has forced CFE and sister company Pemex to ramp up pipeline imports from the US, with existing cross-border infrastructure at full capacity.

Shortages across the southwest of the country in 2013 forced CFE to purchase more LNG on the spot market at a premium to northeast Asian prices to cover demand through to the end of 2014.

While new cross-border pipelines currently under development are expected to ease the gas crunch from next year, infrastructure is not expected to penetrate areas around Manzanillo until 2016 at the earliest.

“Peru remains the best situated supply point to deliver natural gas to Manzanillo and southwest Mexico,” one Americas-based source told ICIS. James Fowler

By James Fowler