• 3 minutes Could Venezuela become a net oil importer?
  • 7 minutes Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase
  • 12 minutes Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 16 hours Could Venezuela become a net oil importer?
  • 8 hours Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase
  • 19 hours Tesla Closing a Dozen Solar Facilities in Nine States
  • 43 mins Oil prices going Up? NO!
  • 16 hours Gazprom Exports to EU Hit Record
  • 17 hours EU Leaders Set To Prolong Russia Sanctions Again
  • 15 hours Could oil demand collapse rapidly? Yup, sure could.
  • 9 hours Oil prices going down
  • 19 hours Why is permian oil "locked in" when refineries abound?
  • 15 hours Oil Buyers Club
  • 19 hours EVs Could Help Coal Demand
  • 7 hours Russia's Energy Minister says Oil Prices Balanced at $75, so Wants to Increase OPEC + Russia Oil by 1.5 mbpd
  • 1 day China’s Plastic Waste Ban Will Leave 111 Million Tons of Trash With Nowhere To Go
  • 1 day Saudi Arabia plans to physically cut off Qatar by moat, nuclear waste and military base
  • 2 hours Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 13 hours Saudi Arabia turns to solar
Alt Text

Australia Looks To Tackle Its Looming Gas Shortage

The world’s soon-to-be top liquefied…

Alt Text

What Will Follow The Age Of Oil?

Natural gas production is exploding…

Alt Text

Azerbaijan’s Pipeline Conundrum

Azerbaijan’s European pipeline project is…

Susan Sakmar

Susan Sakmar

Susan L. Sakmar is a visiting law professor at the University of Houston Law Center where she teaches a course on Shale Gas & LNG.…

More Info

Trending Discussions

OPEC Cut Could See LNG Prices Rise

Natural Gas Storage

With most of the energy world focused on the upcoming OPEC meeting and whether oil ministers will agree on production cuts in order to help boost oil prices, it’s a good time to review why the LNG industry also closely follows the price of oil.

Traditional Pricing Structure for LNG—Oil Linked Pricing

The vast majority (approx. 70 percent) of the world’s LNG trade is priced using a competing fuels index, generally based on crude oil or fuel oil, and referred to as “oil price indexation” or “oil-linked pricing.” The original rationale for oil-linked pricing was that the price of gas should be set at the level of the price of the best alternative to gas. Historically, the best alternative was heavy fuel oil, crude oil or gas oil. While the substitutability of oil and gas has decreased over time, the traditional oil-linked pricing remains.

This is particularly the case in the Asia-Pacific region where LNG contracts are typically based on the historical linkage to the Japanese Customs-cleared Price for Crude Oil (JCC, or the “Japanese Crude Cocktail”). This is because when LNG trade first started in Japan, Japanese power generation was heavily dependent on oil so early LNG contracts were linked to JCC in order to negate the risk of price competition with oil.

For suppliers, oil-linked contracts have traditionally provided a means to secure project financing and a return on investment. Since LNG projects are multi-billion dollar investments, underpinning the project with long-term, oil-linked contracts is usually necessary to secure project financing by lenders. For buyers with security of supply concerns, most notably Japan and Korea, oil-linked contracts have also ensured that enough new LNG supply comes on the market since the long-term contracts underpin the project and reduce the risk for the project developer.

In North America, the gas market originally operated in a similar manner with long-term, oil based contracts. When the North American gas markets were liberalized in the 1980s and 1990s, a “hub” system developed whereby natural gas is now traded at over forty principle centers, or hubs, spread across North America. The best known is Henry Hub in Louisiana, which serves as the pricing reference for NYMEX gas futures contracts.

Recent Pricing Issues

In the past several years, there has been increased discussion between Asian buyers and sellers about alternative pricing structures for long-term LNG contracts. The emergence of the United States as a major LNG exporter has had a significant impact in moving this discussion along since most U.S. LNG contracts have been “take or pay” style contracts linked to Henry Hub, instead of oil, with the buyer paying a liquefaction tolling fee to the LNG export terminal developer. Related: Geopolitical Overhaul: What Will A Post-Obama World Look Like?

At the moment, the LNG market is oversupplied with new supply coming on the market from Australia and Papua New Guinea. In February 2016, Cheniere Energy shipped the first U.S. LNG export cargo and has been ramping up production ever since. With four more projects under construction and many more projects proposed, the U.S. is expected to become one of the world’s largest LNG exporters in the coming years.

 

(Click to enlarge)

This new supply is coming on the market at a time of weak demand in most regions due to a variety of factors, including a tepid economic outlook for most countries and competition from cheap coal and renewables. As a result, it is a “buyers” market and buyers are using this to their advantage to seek more flexible pricing and contract terms. Given the current oversupply, new buyers are increasingly reluctant to sign long-term contracts linked to oil and are instead seeking more mid-term and short-term contracts. Related: Oil Comes Back To Life In Canada

Buyers have also been turning to the growing spot market for LNG with Asian spot LNG prices already halved since 2014.

(Click to enlarge)

While it is open to debate how much the spot market will continue to grow and whether LNG will eventually trade as a true global commodity like oil, most industry observers expect the LNG markets to continue to evolve from the traditional rigid structure of long-term, oil-linked contracts to a more dynamic, flexible structure that better reflects market realities.

By Susan Sakmar for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment
  • Herman Goodfellow on November 29 2016 said:
    Make America's energy supply secure by shipping US gas to China.
  • kal buzzy on November 30 2016 said:
    LNG could be a good alternative fuel if you disregard the radioactive lead Pb micro particles from the radon , around 10 tons per year for a 4 train plant. so for the texas LNG plant, what is their Pb mitigation plan?

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News