LNG hubs—more global, more liquid
Demand is keeping up with supply. But new flexibility and hubs are changing the trading environment
Increasingly flexible supply helped the world's liquefied natural gas market overcome expectations of a glut to absorb an 11% increase in production last year. Higher demand in key consumer countries helped, but new infrastructure in emerging gas markets; more flexibility on contract terms and prices; international traders' increased presence; and the gradual emergence of pricing hubs in the dominant Asia-Pacific market all contributed.
"This is all part of the globalisation of gas", says a long-standing industry observer. Industry officials point out that the market's ability to absorb further supply from leading producers Australia, Qatar, and the US in coming years will be linked to its ability to become yet more flexible. In this context, the continuing development of gas-trading hubs in the three major markets: Europe, Asia, and the Americas, will be key. But progress is likely to be incremental.
Global LNG supply rose by about 30m tonnes in 2017, to about 377m, after a 7% rise in 2016, according to gas industry association Cedigaz. During the year, new liquefaction trains in Australia began commercial exports, and the US began shipments from Cheniere Energy's Sabine Pass trains. But LNG demand increased markedly: China alone absorbed nearly 40% of the additional supply, and Southern European countries increased their LNG imports, Cedigaz notes.
New infrastructure and shorter, more flexible, contract tenors helped the market absorb 2017's LNG output increase. The number of floating storage and regasification units (FSRUs), on stream since 2015 and 2016 in the Middle East and Asia, increased throughput. Some of these are supplied by companies outside the historically dominant LNG-portfolio players. According to consultancy Wood MacKenzie, last year international traders Glencore, Gunvor, Trafigura, and Vitol accounted for 9%, or about 27m tonnes, of world LNG sales.
Pricing flexibility allowed the market—which LNG traders estimate is still over 70% dominated by long-term, oil-indexed contracts—to adjust and helped place the increased production volumes. With the launch of American LNG exports, Henry Hub pricing emerged as a new international market touchstone. Japanese delivered LNG prices rose to end the year at $8.10 per million British thermal units, against $7.10/m Btu in December 2016, while US LNG was made more competitive as rising supply in the Lower 48 states drove the Henry Hub spot gas price down to $2.18/m Btu in December, from $3.59/m Btu a year earlier.
As the year progressed, the so-called Henry Hub Plus export formulae, which already strongly influence Latin American gas prices, became increasingly attractive for exports to Asia. It remains to be seen how Henry Hub prices will evolve as more US liquefaction trains, such as Dominion Energy's Cove Point, come on stream and exports drain gas from the Lower 48 market.
US gas hubs have long been the world's most liquid and heavily traded. As US gas exports grow—the country became a net exporter only last year—market activity can be expected to take increasing note of their effect on domestic pricing. Price reporting agencies such as S&P Global Platts and Icis/Heren already publish assessments for US LNG spot transactions FOB US Gulf using Cheniere's Sabine Pass terminal as a basis. Industry officials say these may evolve additional assessments covering Henry Hub-to-LNG-export-terminal differentials and US-to-northwest European Title Transfer Facility (TTF) differentials.
In the EU, price differentials between the northwest European trading hub TTF and Italy's PSV have narrowed as improved market liquidity and infrastructure, including pipeline flow-reversal capability on some cross-border transmissions systems, have improved. Spain's Mibgas market is still in evolution and constrained by limited pipeline access to the rest of the EU, but Spanish authorities reportedly plan to offer LNG products as the market develops. Southern European markets' past bias towards market intervention, particularly when pricing doesn't mirror declared government priorities, may slow the evolution of liquidity. But bringing the largest EU LNG market, Spain, into the hub-pricing constellation might improve Atlantic Basin market liquidity.
With the launch of American LNG exports, Henry Hub pricing emerged as a new international market touchstone
In LNG's dominant Asia-Pacific market, which accounts for nearly 70% of world LNG imports, there is increasingly enthusiastic talk of developing one or more LNG hubs, with Japan, Shanghai, and Singapore all contending for pride of place and price-reporting agencies highlighting increased trading activity around assessments. But industry officials note that the Asian markets face several hurdles, including geography, lack of pipeline interconnections, and regional governments' failure so far to impose deregulation on their own markets.
"They're only going to get a liquid market once these various downstream markets take steps towards deregulation themselves", says an analyst with a large LNG-portfolio player, noting that full gas-market regulation took over a decade in the US and UK, and nearly 20 years in the EU. Those markets all began liberalisation in systems that benefited from active, developed and interconnected infrastructure, which most Asia-Pacific markets lack.
Market participants also say new entrants on the LNG production and trading side take up a relatively small share of the market, while consolidation among major buyers and portfolio players to create entities such as Japan's Jera, today's Shell (incorporating the old BG Group), and the forthcoming combination of Total's and Engie's LNG units increase rather than decrease market concentration.
Opinions differ as to which of the candidates to develop LNG Hubs is most likely to succeed. From a financial-trading point of view, many think Singapore's history as an entrepôt with active financial markets; a long history as an oil-trading centre; supportive regulation; and gas consumption and storage, albeit small, gives it the edge. Japan's lack of a physically integrated gas market is seen by many as a long-term disadvantage in its establishing dominant hub status.
From a physical-market point of view, some observers place their bets on Shanghai. They contend that China's combination of market potential, pipeline and LNG imports, and domestic gas production could form the basis for the region's dominant market. But the authorities must commit to further a deregulation and liberalisation agenda.
This article is part of a report series on Global LNG hubs. Next article is: Hurdles face putative Asia-Pacific LNG hubs