Trade patterns and prices are shifting — and the shifts feed off each other

Trade patterns and prices are shifting

Gas, through LNG, is ideally placed to expand its role as one of the world’s key energy sources in a cleaner future. But the business still needs to be reoriented around customer value in an affordable, accessible and acceptable low-carbon system.

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Changes in trade patterns

Greater buyer power, an excess of uncontracted LNG, a greater diversity of players and more flexible import infrastructure is driving a shift towards increased spot trade and shorter-term contracts, and a preference for Free On Board (FOB) rather than Delivered Ex Ship (DES). Spot and short-term trades reached almost 30 percent of overall trades in 2015. The expansion of the Panama Canal reduces journey times for US Gulf suppliers to Asia by 11 days. As the glut of supply pushes prices down, buyers will seek to minimize their purchases of long-term, oil-linked LNG in favor of spot supplies, and to renegotiate or exercise price redetermination clauses. Although in the short term, suppliers may perceive this as negative, it makes LNG more attractive to buyers — so in the medium term, this expands the addressable market.

New pricing formulas moving away from the oil link

A deeper, more liquid, more commoditized market, with new players along the chain, is spawning more variety on pricing — even as arbitrage between the major markets narrows. US suppliers are offering formulae based on Henry Hub, Singapore is promoting itself as a pricing hub, while price reporting agencies now quote Middle East assessments (based on delivery to Egypt) alongside the established JKT price. China, with access to domestic and imported pipeline gas as well as LNG, is another possible price hub. New pricing bases create portfolio challenges for both suppliers and buyers. Even as global LNG prices converge, differing only by the cost of transport, end-user pricing preferences may diverge to include oil-linked gas, hub gas, or coal. Buyers have to be confident their pricing basis aligns with that of their ultimate customers, who may be end-users of gas and/or electricity. New hubs create market tools for managing price risk, via hedging and options, but will take time to attract sufficient liquidity. On the supply side, suppliers need to ensure sufficient revenues to underpin multi-decade investments in the tens of billions of dollars, and are doing so by looking for value within and along the supply chain in new business models and under new partnerships and adjacent activities.

New players, new roles

With commoditization, new markets and new routes come new roles. New suppliers include operators of smaller, sometimes floating, liquefaction plants as well as tolling operators including several of the US projects. Big commodity traders, such as Vitol, Trafigura, Glencore, Mercuria and Gunvor, are entering the LNG business, as are oil companies that (so far) do not have LNG production of their own, such as Rosneft. Lower LNG prices and a more liquid market reduce the financial exposure on a single cargo. Companies such as Shell and BP have long had strong LNG trading desks, but now traditional Asian buyers are becoming traders too — with JERA trading cargoes from Japan to Europe, and stating its intention to expand pan-Asia. Qatargas and ExxonMobil have formed a joint venture, Ocean LNG, to market their share of LNG from outside Qatar, particularly from their Golden Pass US venture. The growing use of FSRUs creates a need for providers who often rent out the vessels for relatively short periods, such as Excelerate and Golar. Small-scale LNG for shipping, ground transport and isolated users will create further business in LNG storage, breaking bulk and redistribution. Commoditization will bring the expansion of market mechanisms. As Vitol’s head of LNG, Pablo Galante Escobar, told the Financial Times, a larger LNG derivatives market will develop similar to oil.4 Traders are investing in physical LNG infrastructure, with Vitol restarting an import facility at Teesside in North East England to give them advantages in market intelligence and access — similar to those they have in oil and metals markets.

Footnotes

1 RasGas, Petronet Revise LNG Contract to Lower Indian Prices, by Debjit Chakraborty and Rajesh Kumar Singh, December 31, 2015, https://www.bloomberg.com/news/articles/2015-12-31/ rasgas-petronet-revise-lng-contract-to-lower-indian-gas-prices

2 ‘Vitol LNG chief says ‘price war’ could drive UK gas prices below US’ Financial Times, 23rd February 2017, https://www.ft.com/ content/3a32d096-51aa-3b8b-8792-6e4f52a41787
 

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