This article is featured in NGW Magazine Volume 2, Issue 18

By William Powell

The liquefied natural gas market is becoming freer and ever shorter-term – even in Asia. But the amount of uncontracted LNG coming on to the market requires much better communication between buyer and seller, especially where price signals are concerned. Cedigaz puts 2024 as the market balancing date.

 

Perhaps as much as 20mn mt/yr of Asian contracts are due to expire at the end of this decade, with more to come in the next decade. There is a lot to play for, as buyers have to weigh up the risk of energy insecurity against the value of lower prices. However much of that supply is rolled over, it will not be on 20-year contracts or linked to crude – a commodity now looking more stable than it did before mid-2014.

 

There are some big unknowns regarding future LNG demand and supply. China has bought much more LNG than expected this year. Even a small percentage change there can have a big effect in volume terms. So a cargo that is now looking quite cheap would a few months ago have been thought expensive. Its commitment to cutting coal has already had a marked effect, as has its embracing of LNG not only as a transport fuel but also as a delivery mechanism to inland factories.

 

Another unknown is the oil price. If Brent stays around $45/b, the economics of switching from fuel oil or diesel to LNG are far worse than if it is at $60/b. The growth of renewables and the return of Japan’s nuclear plants are two other threats to demand. Gas has to remain competitive with coal in Asia in particular, and good information on price enables rational trade and minimises waste. Luckily there are factors favouring open trade over the extension of those secretive terms that dominate Asian gas today much as they dominated European gas.

 

Free trade is the fairest solution to oversupply and agreeing standard contract terms is a good place to start, as it would extend the churn ratio and so generate more liquidity and confidence in the market depth. 

 

First, LNG is becoming more fungible as US and Australian coalbed methane are both lean and coming on line in different basins, facilitating more swaps. If the many different grades of crude oil can be traded, then LNG with its two basic varieties should manage it. Second, US LNG brings with it Henry Hub pricing: even if on the face of it there is very little sense in using a domestic US price to determine a domestic Asian price, it at least offers an alternative to oil and many Asian players have US gas price exposure. Third, more parties are involved. In today’s lower price environment, some long-term relationships are going to have to be sacrificed on the altar of economic efficiency and shareholder returns. But as the demand side widens and new countries join the ranks, traders can find their niches to everyone’s benefit. Creating demand will strengthen prices, even enabling some of the cheaper upstream projects to start earlier.

 

Technology companies can also enter the market with floating regasification and storage vessels and floating gas to power projects. As these are not only mobile but cost perhaps a tenth as much as an onshore terminal, banks need not worry so much about counterparty risk or locking up offtake for two decades. Bankers will however need to talk more to both sides about their needs and also to become more flexible – if they think LNG will be a market they want to stay involved in.

 

Deciding what the LNG price will be linked to is a major challenge, also requiring dialogue: the only common ground so far – among buyers at least – is that it should be related to the supply and demand of gas, not oil, and at the point of consumption not production. 

 

In the UK two decades ago, gas competition was introduced by an aggressive government at a time of oversupply, guaranteeing a fall in price. Pipeline access was opened up for third parties. Trading over the counter or on exchanges exposed the falling value of gas. The genius of the National Balancing Point lay in its disconnection from the physical world of pipes and compressor stations.

 

Asia is not there yet: there are no standardised contracts, no overarching grid, nor is there a single agreed point for trading at, although China, Singapore and Japan are all capable of fostering gas to gas competition. They all have drawbacks: corporate governance in the case of China; regional, separate pipeline networks in the case of Japan; and only a very small amount of physical delivery, in the case of Singapore.

 

Aside from using brokers, there are now at least three ways for traders to send signals to the market: Platts’ Japan Korea Marker is one instrument that has gained traction by aggregating liquidity in a vast area; another is the Singapore Mercantile Exchange LNG futures contract; and a third, and perhaps the most promising for the longer term, is GLX, a purely physical delivery trading platform whose launch is expected in October. 

 

Collecting in one place a verifiable set of transactional data from both buyer and seller, GLX will have the potential – which it is for now distancing itself from – to produce volume-weighted or other indices for any period, terminal and quality; and derivatives from those. Maybe this will be the tool the market needs to help it manage its vertiginous position.