The lead story of our last issue described the stand-off between LNG sellers and buyers that was much in evidence at the recent Gastech conference – and the calls from several industry leaders, among them Martin Houston, former BG Chief Operating Officer and now with Parallax Energy, for the “logjam” in LNG trading to be broken.
In this interview, conducted at Gastech, Houston explains why that needs to happen and how it might come about.
Gastech News: You’ve spoken here at Gastech about the need the break what you describe as the current “logjam” in LNG trading. Are you saying that the stand-off between suppliers and Asian buyers has reached a stage where they’re just not buying?
Martin Houston: Well, I don't see them buying, personally. There is a stand-off. If you listen to what Dato’ Shamsul Abbas [the CEO of Petronas] said in Singapore recently: “The behaviour we are all demonstrating is exacerbating the very problem we’re trying to fix”.
That's what I see. In a sense, we’re posturing. We’ve seen a bit of supplier posturing; we’ve seen some buyer posturing. But what I've heard [here at Gastech], as well the rhetoric, are areas of considerable rapprochement. Amongst the panel this morning, on the demand side, I thought there were some rational elements that speak to how we might [move forward]. And you've heard some of the suppliers say things that you, in your career, have never heard them say before.
Gastech News: Can you give some examples of areas of rapprochement, as you describe it?
Martin Houston:You heard at least one of the panellists in the first session this afternoon say “there will be new ways of contracting LNG”. Now, five years ago would you have heard that at a Gastech conference? I'm not so sure you would. As I’ve said, Henry Hub is here. The phrase that was used [at the CWC LNG conference] in Rome at the back end of 2013 was “the Henry Hub genie is out of the bottle”. It's been contracted. We’re seeing hybrid pricing. We’re seeing pure hub pricing. We're seeing some oil pricing as well.
My concern is that the industry has to be careful about moving to something it doesn't understand. Oil has worked perfectly as a marker for a long period of time. Indexation – or price formation – and price are two entirely different things, and one can adjust the slope [in oil-indexed contracts]. This can be dealt with through slope and oil is an understandable and relevant commodity in this space. Henry Hub? I don't know.
We saw $8/MMBtu gas in December in North America, mainstream, not at the ends of the pipeline, Nymex traded gas at eight dollars. That was on a bit of cold weather. What about adding 20 Bcf of new demand by the end of the decade? How's that going to change the price? How much stability is that going to give against something which has its own discrete and separate volatility from oil – a commodity everybody has understood, that this industry has been founded on, and which represents, to a large degree, a substantial part of the alternative fuel mix.
Gastech News: You've been in this industry a long time. How could the industry break the logjam? Where do you begin?
Martin Houston:It's obvious to everybody that we’re going to have to sit down across tables and get some of this new supply to market. We’ve got a lot of trains of LNG waiting to go there. I sense that the industry will do what it’s always done, which is to be pragmatic at the end of the day.
We’ve seen a bit of a revolution in the industry in the last couple of years. I think it's a case of recognising “fine, that was yesterday’s story; tomorrow’s story is what we do as a result of it”.
The panellists on the supply-side have made some very valid points. Long-term security of supply is good for both sides. Security of demand is important. Security of supply is important. You've got to match the two together. My sense is it'll happen. The buyers are pragmatic; the sellers are pragmatic.
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