Pricing up and down
A trend towards increased spot sales and more flexible contracts is keeping the global LNG industry on its toes
The rollercoaster ride in oil and liquefied natural gas prices since 2014 has shaken up previously staid LNG pricing mechanisms and contract terms. Buyer aggressiveness; the emergence of international trading companies as significant market participants; and the growing US role in LNG supply have all affected contract structures.
But market participants say the evolution towards a world price for traded gas still has some way to run. Japan is the world's largest single LNG destination and the lynchpin of the Asia-Pacific LNG market, accounting for 73% of world imports, according to the International Group of LNG Importers. Since 2014, the spot price of LNG delivered to Japan has swung between a high of $18.3 per million British thermal units and a low of $ 4.10/m Btu, and currently stands around $8.80/m Btu, according to Japan's Ministry of Economy, Trade and Industry. During that period, market expectations have shifted from forecasts of a glut in LNG supply, to current belief in a tightening market in the early 2020s. Pressure has mounted on suppliers to change pricing and contract tenors and flexibility.
On the pricing front, expectations at mid-decade were that US LNG, with pricing based on US natural gas futures prices plus a premium and liquefaction fees, would exert price-setting power in the market. But those expectations haven't so far been realised, although many buyers have incorporated US LNG in their portfolios. However, increasing availability from the US and Australia, and a forecast jump in volumes from Qatar, have pressured prices lower for oil-indexed contracts.
25%—Spot and short-term-contract share of total LNG sales
Supply contracts to India have recently been the most publicly affected. India's Gail and Petronet LNG have renegotiated pricing on LNG contracts from Qatar, Australia and Russia, which were agreed in 2012-14, to match lower prices now available from other suppliers. The renegotiated prices for delivery to India appear consistent with Bangladesh Petrobangla's agreement with Qatargas for a 12.6-13% of Brent DES price for LNG delivery to a new-build floating storage and regasification unit.
With lower pricing have come more flexible contract terms, including a loosening of destination limitation clauses. Buyers, such as Japan's Jera, the world's largest LNG purchaser—which recently absorbed French EDF's LNG trading arm—are flexing their market muscle with regulatory backing to push suppliers to ease destination restrictions.
Elimination of destination limitation clauses was a key step to liberalising European gas markets, where regasified LNG competes with pipeline gas via gas-on-gas pricing. Such changes are one reason for a rise in spot and short-term LNG transactions. According to the Shell LNG Outlook 2018, such trade has risen to nearly 25% of the market from 10-15% in 2010. Further price and risk management evolution, including increased liquidity in forward and financial LNG markets, likely will evolve as the market tackles the credit status of many new buyers. Shell notes that new long-term purchasers of LNG are increasingly "non-investment grade". LNG participants say markets such as Egypt, which is now winding down LNG imports as domestic gas output rises, have occasionally presented significant payment risk.
Whether pricing evolution will continue to evolve remains an open question. Oil prices, and oil-indexed LNG prices, are now rising and portfolio suppliers such as Shell are forecasting a supply-demand gap emerging in the early 2020s. So, new liquefaction projects may resist short-term contracts and non-investment-grade buyers in order to obtain finance. That, in turn, could reduce market liquidity and slow pricing evolution. Many market participants note that a key basis for liquid international LNG markets will be liquid domestic gas and power markets. In the Asia-Pacific region, such markets are developing slowly.