Pricing LNG in an evolving spot market

Fiona Poynter's picture
Fiona Poynter, Vice President, LNG Asia-Pacific, Argus Media
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Global LNG spot market trade grew by 45% year on year in 2016, with spot cargoes now trading a number of times before they reach the consumer, and in some cases changing hands up to six or seven times. This marks a dramatic shift away from the “point to point” trade that has historically characterised the LNG market.

The increased presence of trading houses in the market is helping to drive this liquidity, and oversupply in the coming years will ensure that the spot market becomes central to global LNG trade. Increased liquidity is crucial to the development of accurate, credible LNG spot indexes, which can be used to price both short and long-term LNG. LNG price reference points are emerging in the des northeast Asia, des Middle East/India and fob US Gulf Coast regions, and increased numbers of spot cargoes sold on a fixed-price basis are being used to inform price-reporting agencies’ assessments.

LNG trade has increasingly moved to the Middle East and India after years in which it was centred on the major importing countries of northeast Asia. Egypt and Jordan alone imported almost 150 cargoes in 2016, up by 25pc against the previous year. Many of these cargoes were secured through short-term tenders or by trading firms using the spot market to backfill term positions. Growing demand in the region has proved key to driving liquidity across the global LNG market.

Egyptian demand looks set to fall in the coming years as recent gas finds push the country back into self-sufficiency. But there are a number of signals from other emerging importers that the strong regional demand story will continue. Pakistan and Bangladesh both have ambitious import plans. Pakistan currently has one operational LNG import terminal, with a further three terminals under development. Bangladesh is planning around 30mn t/yr of import capacity and has indicated that a large proportion of that LNG will be acquired on a spot basis.

Meanwhile, the number of participants in the LNG market is increasing rapidly, with a steady stream of new entrants. In a single Egyptian buy tender awarded last year, 10 suppliers were successful. Awards included longstanding LNG players like Shell and BP, but also saw newer entrants like Trafigura, Noble and BB Energy win large chunks of the tender, as well as companies like PetroChina who had previously been sole buyers of LNG. Trading houses are increasingly playing a key ‘go between’ role in the traditional producer to importer model. In many cases this is because these trading firms are willing to take on credit risk with new buying countries that the traditional producers are unable to.

A reliable price reference that is representative of regional supply and demand fundamentals is key to ensuring the competitive, efficient functioning of the market. Rising LNG spot prices across the Middle East and Asia-Pacific in Winter 2016/17 caused the decoupling of prices in these regions from the UK’s NBP, demonstrating the unreliability of using the UK gas hub to price LNG deliveries into the Middle East or northeast Asia. More recently, the spread between the Argus Northeast Asia (ANEA) Index has diverged from the Argus Middle East/India (MEI) Index, highlighting the need for an individual price reference for each of these key LNG demand regions.

Fob US Gulf Coast LNG pricing also has the potential to become a key global pricing point, since this supply is not subject to the destination clause restrictions that have historically been part of most LNG supply contracts. Already, we have seen the new Gulf Coast LNG supply respond quickly to global market pricing signals – heading to northeast Asia when prices surged over winter 2016-17, and later to Europe’s premium markets in Spain and France.

Share your insights and join the conversation: Do agree that a reliable price reference representative of regional demand is key to ensuring the competitiveness of the market? Leave your comment below.

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Image courtesy of Argus Media