The Coming Revolution in LNG Pricing

Even if it's a fossil fuel, natural gas burns cleaner than coal. Even if it has been hardly feasible to transport it long distance and overseas in its natural state, a process to cool it to liquefied natural gas (LNG) was developed in the 19th century, and commercial LNG shipments began more than 50 years ago. Since the first LNG tanker shipped the first commercial LNG cargo from Algeria to the UK in 1964, natural gas has become one of the most traded commodities in the world.

However, the gas trading markets around the globe are still highly regionally segmented with enormous price spreads between the U.S., Europe and Asia due to highly specific and variable factors such as pipelines, shale gas, geography, geopolitics, supply, demand, and shipping costs. Although the size of the gas trading market may be such as to call for a global benchmark price, setting a gas price the way oil has may not even be a medium-team possibility.

The U.S. has its benchmark; gas prices are based on delivery at the Henry Hub in Louisiana. On the New York Mercantile Exchange, the price of natural gas for October delivery is in the range US$2.80-2.90 per million British thermal units.

To put this price into perspective, the World Bank's Commodity Price Data from early August put the U.S. price for July at US$2.8 per million British thermal units. Whereas Japan's LNG price was US$6.0 per million British thermal units and Europe's natural gas price was US$4.5 per million British thermal units.

The U.S. shale gas boom has also helped keep the natural gas prices in North America way lower than in the rest of the world. And the U.S. is on track to becoming a net exporter of the commodity, with a saturated domestic market, which has been the main traditional destination of Canadian gas. Moreover, natural gas output from the Marcellus and Utica shales was averaging 22.63 billion cubic feet per day in August, up 2 percent from July and the most since February's all-time high of 22.78 billion cubic feet per day. Related: The Biggest Wildcard For Oil Prices Right Now

In Europe and Asia, however, it's a quite different story.

In Europe, there are several main trading hubs. One is the UK's National Balancing Point (NBP): the wholesale gas market of one price for gas regardless of where the gas comes from. Another is the Dutch Title Transfer Facility (TTF). Prices in the UK are quoted in sterling, prices in the Netherlands - in euros. Unlike the U.S., Europe alone does not have a benchmark price. Following the UK's vote to leave the European Union, the TTF may have more chances to become the dominant gas trading player as Europe seeks to unify markets, Marco Alvera, chief executive at Italy's gas infrastructure company Snam, has said in an interview with Bloomberg.

In Asia, we have the Platts Japan Korea Marker (JKM), the LNG benchmark price for spot physical cargoes delivered ex-ship into Japan and South Korea.

Although a global gas benchmark price is nowhere in sight, the International Energy Agency (IEA) said in June in its Medium-Term Gas Market Report 2016 that between January and May 2016, the average differential between Asian LNG spot prices and U.S. prices was just US$2.5/MBtu, well below the average spread of around US$11/MBtu that had prevailed between 2011 and 2014. Gas prices in Asia will continue to be influenced by oil prices, but a period of expected oversupply and increasingly flexible LNG markets is seen to gradually reduce that gas/oil price correlation. In addition, new LNG supplies will create major shifts in the gas trade patterns worldwide, the IEA said.

Time will tell how these major gas trading shifts will impact regional gas prices and if regions would be willing to move closer to more unified gas trading markets.

By Tsvetana Paraskova for Oilprice.com

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