Grupo de Economia da Energia

Recent development and trends in pricing in the global LNG market

In LNG, natural gas on 29/11/2010 at 00:52

By Edmar de Almeida

The global Liquefied Natural Gas (LNG) trade has experienced an enormous expansion in the last two decades. This expansion was accompanied by an important evolution in pricing and types of contracts for LNG trade. Traditionally, LNG trade was supported by long-term contracts with a pricing trying to link the price of LNG to the competing fuels (oil or its byproducts). Until now, this sort of trade prevails in the LNG markets in Asia and parts of Europe.

The liberalization of gas markets in North America and some European countries allowed the appearance of new rules on pricing of natural gas. With the gradual increase of gas-gas competition, some short-term and spots markets were developed, allowing the use of new indexes for natural gas trade. Concurrent with the appearance of gas spot markets in North America and Europe, we have witnessed a fast development of the LNG market in the Atlantic Basin. The regasification capacity of the Atlantic Basin is now approaching half of global capacity. United States and United Kingdom, as an example, had stopped importing LNG in the 1980s, and returned to import LNG in 2000.

Figure 1 – 2005-2010 Global Regasification Capacity

Source: Plats

Countries with open gas markets entering global LNG trade have induced the use of new ways for LNG pricing. These countries began to use the price of gas, in the spot market, as indexes for LNG import contracts. LNG import contracts for the United States used the price of gas in the Henry Hub spot market, and contracts for UK used the NBP (National Balancing Point) spot price. LNG import contracts indexed to Henry Hub and NBP were split into short-term contracts or option contracts in the secondary market. That is, the LNG supplier for a single consumer in the U.S. or UK always has the option not to deliver LNG and buy the corresponding volume in the spot market of such countries to deliver to its customer. Thus, if third-party buyers are interested, it is possible to resell LNG from these markets at prices higher than those found in their respective spot markets.

Due to the possibility of flexible contracts, LNG trade in the Atlantic Basin increased significantly. Countries seeking a flexible gas supplying, such as Brazil, have found in LNG an interesting solution. The participation of flexible contracts reached about 22% of LNG trade in 2009, and it is expected to reach 30% in 2010 (BP Statistics’ estimate).

Figure 2 – Flexible Contracts in Global LNG Trade
Source: BP Statistical Review

Then, LNG trade in the Americas used the Henry Hub price as index in the contracts. Major players in the LNG industry have invested billions of dollars in liquefaction capacity and shipping without binding these investments in long-term contracts. The U.S. gas market was considered a back-up market for flexible contracts and liquefaction capacity not contracted and offered in the global LNG short-term market. For this LNG marketing strategy, the basic premise is that U.S. LNG imports would tend to increase at the medium and long-term, ensuring a back-up market.

In the last three years, serious doubts arose concerning the validity of this premise. U.S. gas production, then, grew quickly contradicting an expected reduction related to this production. This evolution of U.S. gas production was associated with important technological innovations that have reduced significantly the cost of unconventional gas production. Due to this non-expected growth in production, the U.S. Department of Energy was forced to make successive revisions of their forecasts regarding the LNG import throughout the country.

Figure 3 – United States Forecast for LNG Imports 

Source: EIA-DOE

As U.S. Department of Energy decreased its forecast on gas imports, the market began to issue an important warning sign for LNG producers. The price of gas in Henry Hub followed the fall of oil prices in 2008 and remained flat at a very low base after the recovery of oil prices during 2009.

Figure 4 – Prices of Oil and Natural Gas in Henry Hub (U.S.)

Source: MME

In the last 2 years, the dynamics of the global gas market called into question the gas pricing strategy in the Atlantic Basin. LNG producers began to be exposed to a market risk unknown recently. Uncertainty about the possible evolution of price of gas in the U.S. market led the producers to ask themselves whether it was the moment to use a more conventional gas pricing strategy, particularly in countries where there is no spot market gas.

Currently the global LNG market faces a capacity of liquefaction oversupplied, due to the global economic crisis. In this context, producers still tend to accept contracts binding Henry Hub. However, there are many questions on the development of gas pricing regarding new liquefaction projects. Will the price of gas in the United States remain as a reference for the gas trade in the Americas? Shall the trend of shortening deadlines and increasing the flexibility of contracts persist?

The establishment of a LNG marketing strategy in our region will depend heavily on the answers to these questions.

Click here to access other texts on this blog in English

About the Blog

About the Energy Economics Group

Deixe um comentário

Preencha os seus dados abaixo ou clique em um ícone para log in:

Logotipo do WordPress.com

Você está comentando utilizando sua conta WordPress.com. Sair / Alterar )

Imagem do Twitter

Você está comentando utilizando sua conta Twitter. Sair / Alterar )

Foto do Facebook

Você está comentando utilizando sua conta Facebook. Sair / Alterar )

Foto do Google+

Você está comentando utilizando sua conta Google+. Sair / Alterar )

Conectando a %s