But how high and for how long remain unanswered questions. How should LNG suppliers deal with the uncertainty regarding future prices and supply?

By entering into medium- or long-term supply contracts. Typically, long- and medium-term contracts are for 20 and 10 years, respectively (that’s changing now, though, and long-term is coming to mean 10-12 years). But there are still advantages in these agreements.

While the supplier ties up customer for his supply, he also benefits from some certainty regarding revenue streams. For buyers in a volatile market, like the one prevailing, long-term contracts are favourable because they are assured supply at prices that are more or less fixed. Japan and South Korea, for instance, have entered into long-term contracts with their suppliers world-wide.

In India, Gujarat State Petroleum Corporation (GSPC), the state government-owned hydrocarbon company, for instance, proposes to have its own terminal in Gujarat and has zeroed in on Mundra in Kuchchh and Pipavav near Bhavnagar as possible destinations, and is seeking long term supply arrangements.

“We have started looking for long-term supplies available in the market,” confirms Saurabh Patel, minister for power and petrochemicals, Gujarat state government. GSPC isn’t alone. Shell, too, is in discussion with buyers in India for long-term agreements.

Meanwhile, it is also considering entering into a long-term supply contract with a liquefaction project in West Asia that would benefit its receiving facility at Hazira, Gujarat.

D J Pandian, managing director, GSPC, sums up the issue: “Long-term agreements are the only answer to supply and price uncertainties.”

THE SLIPPERY SLOPE

If only it were as simple as matching demand and supply. But the LNG market is affected by factors that are beyond the control of buyers and sellers.

The cost-escalation in Australia’s Gorgon project and Sakhalin Island in Russia strongly impacted natural gas futures and also LNG prices. It’s gotten worse now, with the Russian government recently cancelling the licence of the Sakhalin II.

Huge question marks now hang over the availability of LNG from these projects in the long run. And the ripple effect is reaching out to affect medium- and short-term supply arrangements being negotiated currently by others world-wide.

In May this year, Chevron, the project operator and 50 per cent shareholder in the 10 mtpa Gorgon LNG development, revealed that the first LNG deliveries were likely to slip to 2011 from the original date of second half of 2010.

Although, industry observers believe a major escalation in construction costs is a big part of Gorgon’s problems. Three years ago, the project was estimated at $11 billion, but rumours suggest that costs may be heading towards $15-18 billion, and will start operation only by early 2012.

The Gorgon news came on the heels of last year’s announcements that costs in the Shell-operated Sakhalin II project had leapt from $11 billion to $20 billion, with a delay of nine months in first gas. The final blow came last fortnight when Russia’s natural resources ministry declared that it had asked the country’s oil and gas development agency to cancel Shell’s environmental licence.

Russia’s attempt to stop the development of its biggest gas project, the $20 billion Sakhalin II scheme in eastern Siberia, could be an attempt to tighten Kremlin’s grip on the country’s energy resources after the part re-nationalisation of oil company Yukos.

Industry observers suggest that a deal is being worked out between Shell, which owns 55 per cent of Sakhalin II, its partners Mitsui (25 per cent) and Mitsubishi (20 per cent), and the Russian government. The promoters may have to dilute their stake by 25 per cent in favour of Russia’s Gazprom

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