World LNG prices are breaking free from oil

How to price world gas remains a tricky subject. Two recent developments, the second one coming with a bit of self-promotion; hope you don’t mind.

First, as we move toward the annual CERA conference, we’re reminded how that very gas-dominated meeting of 2010 focused often on how natural gas was going to be priced in international markets, where benchmarks like the Henry Hub price, or the UK National Balancing Point price, were not readily available. The consensus was clear that some sort of link to oil prices would remain the way that gas would be priced. There was little sentiment that it would end soon either.

The formulas to link natural gas to oil are numerous and complex. For example, at Platts we long have been familiar with a large gas deal that takes gas from Algeria, moved along the Maghreb Pipeline, and sells it into Europe on a formula linked to Platts’ crude oil yields and netbacks.

But less than a year later, there are cracks in the idea that oil would remain the benchmark. For example, last week at the Troika Dialog investment bank’s Russia Forum in Moscow, IEA chief economist Fatih Birol saw 2011 as a possible turning point: “This will be a year in which we will see a major debate between gas importers and exporters about how contracts should be formulated and perhaps they will move away from oil index formula, creating pressure on exporters,” he said.

But that’s not a consensus view. For example, at the same meeting, Tim Lambert, an energy analyst at Wood Mackenzie, said he believed oil indexation in Asia will continue to be the dominant form of pricing because the supply projects are “hugely expensive” and need a predictable structure to ensure the investment is justified. It isn’t clear why a volatile oil market is more predictable than the natural gas market, but the non-US/UK indicators on the price of natural gas remain fairly new, or non-existent. There’s nothing more volatile than a lack of transparency.

But…there may be some change in the air. Late last month, Platts reported that CitiBank executed the first ever financially-settled LNG swap with an international (and unidentified) oil major. That a swap facility in LNG was finally developed is not stunning.

But what was a bit more surprising is that it will be settled against the average Platts assessment of spot LNG prices in Asia, known as the Japan Korea Marker or JKM, over the one-month period. So when the the deal settles out and a price will be established, there won’t be a barrel of oil in sight.

One argument that used to be heard about the way LNG pricing would go is that it might eventually be tied to the US Henry Hub price. The school of thought was that with plans for dozens of new LNG import capacity on the boards in the US, a seller of a cargo of LNG anywhere in the world would need to ask themselves the question: can I do better in the US?

That’s over. The shale gas revolution has put US gas prices $5-$6/Mcf less than LNG elsewhere in the world, including Asia, and import facilities are either not getting built or their owners are petitioning the US government for permission to become an LNG export facility. Just today, New Jersey Governor Chris Christie blocked the Liberty Deepwater Port, which had been the last surviving LNG terminal proposed for the New York region.

So when those US LNG exports make their way into international markets, they’ll need to find a new way to price their material.

Platts