LNG to be Priced off US Gulf, FOB by 2020s

The world might have to wait until the early 2020s for a 'true' price for LNG, according to energy consultant Guy Broggi.

At the moment it is mostly priced off oil, as was European pipeline gas until the trading hubs developed in the UK and Netherlands less than 20 years ago, but this arrangement is unsatisfactory, as geopolitical concerns drive up oil prices and incidentally and adversely affect the prospects of gas replacing coal in Asia.

The former head of LNG at French major Total told the Oil & Money conference in London October 9 that only when US liquefaction capacity additions are producing enough LNG would there be a meaningful free on board (FOB) price for LNG. He said this was the thinking at the International Gas Union: that excess cargoes in the Gulf seeking a home would attract buyers and so lead to price discovery, that would gain acceptance as the market price. From there, shipping, insurance and other costs could be used to calculate a delivered price anywhere else in the world.

At the moment, the Japan Korea Marker, devised by Platts, is used for the overwhelming majority of short term trades in northeast Asia, most of which were originally sold at an oil index or at a lower European hub price. Despite the tenfold increase in trades settled against the JKM in the last year, they remain a very small percentage of the total physical trade, whereas US gas is traded dozens of times before being consumed.

The executive director of the International Energy Agency Fatih Birol told the conference said that this October would see China overtaking Japan as the world's biggest LNG buyer as it replaces coal with gas, but did not go into detail about the relative volumes. On the sell side, "In five years there will be three players in the champion's league: Qatar, US and Australia," he said.

Of those, the first and last sell to Asia on an oil index, but not necessarily at oil parity in energy terms. That pricing system can bring accidental benefits, if spot cargoes are $18-$19/mn Btu and term cargoes only $12/mn Btu, but it does not lead to an efficient market.

LNG demand is expected to grow at about 4%/yr, which is faster than demand for pipeline gas. This will be met by new liquefaction plants in Russia – notably from the Yamal and Gydan peninsulas, as well as east Africa and Australia. European gas production is however falling, and so it is possible that LNG, rather than having to undercut Russian gas to secure market share, will end up setting the price of gas there, rather than taking the price offered. Already this is visible in winter when storage is low and demand high and Europe competes with Asia for LNG. 

This is why Nord Stream 2, with its additional 55bn m³/yr of capacity to bring Russian gas to Europe, is needed, said Shell's CEO Ben van Beurden, "despite all the genuine concerns about it."

The chief operating officer of one Gulf Coast project, Magnolia LNG, said that not many US gas producers were yet interested in selling their gas at a Dutch or UK gas hub index basis, preferring the familiar Henry Hub, which is a deeper and longer-term market. The backer, LNGL is looking to take final investment decision on its Magnolia LNG plant later this year, but that this might slip into next year.

The COO John Baguley said that while it might make sense for an African project, for example Anadarko's in Mozambique where there is no underlying value, to sell gas off a mix of other gas indexes in Europe, the US was a special case: bankers wanted to see a financing structure that was tied back to a real market: Henry Hub. 

The alternative to project financing, Broggi said, is for the project sponsors to buy the offtake themselves, as was the case with LNG Canada, and could be the case with Novatek and Qatari expansions: that is how the portfolio player came about. "Producers with deep pockets do not want to see their molecules without a market.... sometimes the need for long-term contracts is just a pretext to get the buyers on board, so that project financing can be arranged," he said.