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LNG Pricing Models and Market Trends

LNG has traditionally been sold through long-term contracts indexed to oil prices rather than natural gas prices, but recent divergences in regional gas prices and the oil-gas price differential have challenged this model. There are now three main LNG pricing models using different indexes: Henry Hub spot prices, tolling fees based on liquefaction amounts, and short-term spot indexation. As LNG supply and trade have expanded, bringing more options and flexibility to contracts, regional price differentials are expected to gradually narrow but not fully converge as pricing mechanisms migrate only partially from oil-linking to spot-based systems over the medium to long term.

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172 views1 page

LNG Pricing Models and Market Trends

LNG has traditionally been sold through long-term contracts indexed to oil prices rather than natural gas prices, but recent divergences in regional gas prices and the oil-gas price differential have challenged this model. There are now three main LNG pricing models using different indexes: Henry Hub spot prices, tolling fees based on liquefaction amounts, and short-term spot indexation. As LNG supply and trade have expanded, bringing more options and flexibility to contracts, regional price differentials are expected to gradually narrow but not fully converge as pricing mechanisms migrate only partially from oil-linking to spot-based systems over the medium to long term.

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rockkey76
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Contract, Trading and LNG Pricing

LNG has traditionally been sold on long-term contracts indexed to oil prices, rather than being
pegged to a natural gas index. As crude oil prices rise for reasons unrelated to natural gas
fundamentals, there is a risk that price-sensitive buyers of LNG will be scared off. Alternatively,
if crude oil prices are depressed, natural gas prices and in effect LNG prices will feel downward
pressure.
The last few years have seen a record divergence in regional gas prices, driven by both supply
and demand factors, including the US shale gas boom, the European financial crisis and the
Fukushima nuclear crisis. In addition to regional price differences for natural gas, the oil and
natural gas price differential has dramatically decoupled from an “energy equivalency” basis.
The advent of diverse potential new supply sources is challenging the LNG status quo, with
Asian buyers presumably looking to modify or possibly replace their long-standing and relatively
expensive pricing model of gas prices tied explicitly to oil prices.
At present three LNG pricing model are prevalent in different parts of the world. First one is
where LNG Pricing Mechanism in Sales and Purchase agreement is Henry-Hub linked. LNG
buyer pays Henry Hub spot price or agreed percentage on Henry Hub, fixed Liquification fee and
other variable gas fees. Second common LNG pricing model is based on tolling fee. LNG buyer
pays reservation or capacity fee which is paid regardless of whether the customer uses the
facility. This typically covers the project company’s facilities and fixed costs. LNG buyers pay
liquefaction or capacity usage fee which is based on amount of gas liquefied. Offtaker’s risk is
maximum as they sourced gas, deliver gas to liquification terminal and finally offtake gas to
destination. Third and upcoming LNG pricing mechanism is spot indexation. Spot and short-term
markets offer buyers the ability to satisfy unexpected shortages at competitive prices and
suppliers the flexibility to arbitrage prices between alternative LNG markets.
Overall, the simple expansion of LNG itself means more options and flexibility in contracts.
There are now nearly 35 LNG importers, compared to 15 in 2005. There are now 20 LNG
exporters, compared to 13 in 2005. These new linkages between markets and the growing
supply-side competition for premium Asian customers will provide some convergence of
regional prices. Asian prices will be pushed down, while North American prices will increase
somewhat, generally narrowing, but not eliminating, the regional differentials. Going forward
over the medium to longer-term, we expect to see a gradual but only partial migration away from
oil linked pricing to more spot or hub-based pricing.

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