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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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The Coming Revolution in LNG Pricing

LNG

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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  • JHM on September 02 2016 said:
    The price of renewable energy is also a critical factor in a globalized LNG market. For example, LNG at $6/mmbtu produces electricity with a fuel cost of $48/MWh in an efficient combined cycle gas plant. Meanwhile in many parts of the world wind power fully loaded is around $20 to $40 per MWh, and solar around $30 to $50 per MWh. Thus, we really cannot $6/mmbtu to remain as a stable global price for LNG, as wind, solar and other renewable will take market share from gas at lower cost. Long run the global price for LNG drops below $4/mmbtu. Such a price is hardly worth the infrastructural investments for a global LNG market, and investors should be wary of this. Ultimately the LNG market may prove to be a dumping ground for surplus natural gas in oversupplied domestic markets. Alternatively, it could shrink to a small scale specialty fuel market if domestic producers lose heart at low global LNG prices and allow production to decline.
  • Matt Blackman on September 03 2016 said:
    I have a question for JHM re: the comment above that at $6/mmBTUs it costs $48/Megawatt-Hour to produce electric power given that British Columbia is considering launching its own LNG industry. According to the US Energy Information Agency or EIA, the natural gas to electrical output ratio is 10,408 Btu/kWh which means that a million BTUs generates 96 kWHrs of electricity.
    Using this calculation, the cost is quite a bit less than $48/mWhr.

    What am I missing?

    Thanks
  • Alex Kessinger on September 27 2016 said:
    Typical modified Rankine cycle gas powered turbine generators efficiencies are 38%. Combined cycle power plants can hit 40% to 45% but are less common. Using 38%:

    1 mcf NG= 1.07 mmbtus.
    1MW=3.4 mmbtus

    1.07 x 1.62 (38% efficiency) = 1.73 mmbtus NG fuel input required to deliver 1.07 MMbtus to generator. 1.73 x $6/mmbtu= $10.38/mmbtu.
    $10.38 mmbtu x 3.4 mmbtus/mw = $35.29 MW
  • Ian P on December 08 2016 said:
    As well as a suitable fuel for baseload generation, LNG once delivered is in stored form and also used for backup power. Such backup is required by renewables seasonally and on a time of day basis. Looking purely at cost of power basis, its therefore not entirely an apples for apples comparison when the variables are considered.

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