Increased Global LNG Trade May Decouple Gas From Crude Pricing
- May 18, 2011
- Ian Clarke
The world’s liquefied natural gas markets are becoming increasingly independent of the price of crude oil, spurred by increased global trade, industry experts told delegates at the 2011 Energy Risk conference in Houston.
European gas markets have traditionally been tied to the price of crude oil because its production was intrinsically linked to that of crude oil, notably in the North Sea. Yet, conventional natural gas production In Europe is declining and imports of LNG are increasing, which is leading to competition between Europe and Asia for supplies, said Rodney Malcolm, Managing Director of global commodities at Citigroup.
“The cold winter in Europe brought prices close to parity (with Asia),” Malcolm said. That attracted LNG imports, which increasingly are priced against local natural gas price indexes, including the National Balancing Point (NBP) in the U.K., Zeebrugge Hub in Belgium and the Title Transfer Facility (TTF), in The Netherlands.
“In the past two years, we’ve seen more supply and less demand in Asia,” said Malcolm. “That’s led to the development of a spot market in Asia and the creation of an LNG price index, the Japan-Korea Marker (JKM).” The emergence of a JKM forward curve, supported by Platt’s, a supplier of independent energy market pricing, means that the first LNG derivatives based on the index have been traded, he said.
In addition, demand growth in China, which currently uses gas for about 4% of its overall energy needs compared with a global norm of about 16%, will boost demand in the region. That, coupled long-term supply contracts reaching expiration, is likely to require more flexible contracts and with them, a greater need for risk management tools in the LNG markets.
The prospect of North American imports and exports to and from both Canada and the U.S. also is likely to lead to more independent pricing for LNG, Malcolm said. “All planned LNG facilities (in North America) are going to be two-way, so the U.S. could become a swing player in the global LNG market.”
Canadian exports are more likely in the near term, because the Canadian government generally is more predisposed to energy exports compared with the U.S., Malcolm
While North American LNG exports are not yet a reality, Cheniere Marketing has applied to the U.S. Department of Energy for permission to export LNG from at least two facilities on the U.S. Gulf Coast. The recent abundance of U.S. natural gas, driven by the surge in shale gas production, means the U.S. has the potential to be competitive in the global markets, Davis Thames, President of Cheniere Marketing.
“We have enough gas in place to keep prices low,” Thames told Energy Risk delegates.
Cheniere is seeking to price LNG exports based on a formula that includes a capacity fee that would include liquefaction regasification costs, plus a feed gas cost based on the price of natural gas at the principal U.S. trading location of Henry Hub. Customers would be expected to supply liquefaction fuel of about 8%-12% of the volume to be liquefied. Sales would be free on board the U.S. Gulf Coast, Thames said.
When asked about the timing of any potential export approval, Thames said his company remains optimistic that approval will be granted but couldn’t speculate when approval might be granted.