Adopting a central LNG marketplace: A key solution for the industry

Ajay Batra's picture
Ajay Batra, Co-Founder and President, Redwood Markets
Dan Zastawny's picture
Dan Zastawny, Co-Founder and Senior Vice-President, Redwood Markets
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What will it take to have a liquid market for LNG, and why is it important? 

This is a question that participants in the global market for LNG should be asking.  The market for LNG is growing and evolving, however, the foundation required for market liquidity is lacking.  Liquidity growth is key to increasing price awareness and forecasting, reducing risk, attracting new markets and market participants, driving investment and growing opportunities to provide new products and services.  Today’s LNG market, however, is missing many of the necessary cornerstones for liquidity development.  LNG is positioned to be the benchmark for global energy in the future, but before it gets there these cornerstones will need to be in place.

The key challenges that need to be addressed are the lack of standard trading terms and practices, the fragmentation of market activity, and the lack of price transparency.

Standards development in LNG is lacking both in the underlying legal terms and conditions that provide the foundation for transactions, but also in the trading process itself.  That includes the day-to-day quoting of products, pricing and other basic commercial terms and trade structures.  In many domestic commodity markets, these standards come from a combination of market regulation and industry trial-and-error.  In the global market for LNG there is no regulatory body with a broad enough jurisdiction to enforce standards, and thus far the industry has produced little or no adoption of the numerous attempts at standardization. 

Currently, LNG could be described as a market without a marketplace.  There is an increasing amount of supply, demand, and spot transactions, however, the market activity takes place in numerous disconnected venues.  Direct bilateral communications, sealed-bid tender processes, and to a lesser extent third-party consultants/brokers each have activity in the space.  For liquidity to develop, market activity needs to be consolidated in fewer venues.

Perhaps the biggest challenge to overcome in the LNG market is the lack of transparency.  Market participants struggle to determine price, and there is an imbalance of information that tends to favour the larger, integrated traders.  The lack of transparency is also problematic in the indexation of LNG markets since a growing futures market is creating more incentive to drive spot prices.

A solution that tackles these problems is the adoption of a central marketplace for LNG trade.  The role of a central marketplace is specifically to reduce the friction of trading.  An independent and neutral market operator can provide the forum for publication, and more importantly the use and execution, of trading standards both in the legal and practical context.  By increasing the visibility of standards and their use, the market can more efficiently move from a wide set of diverse terms to an increasingly standard set of terms over an expedited time frame.  A central marketplace will also allow for the consolidation of a trading activity into a common bid-offer stack, allowing the market to see the true supply and demand for a transaction at any given time.  The key to a central marketplace is the drive toward fully transparent markets, where bids and offers can be accessed by the market on a level playing field in an open, fair, efficient and competitive basis.  This is best handled by a truly independent market operator that is not biased toward any participant, but rather only biased towards efficiency and greater liquidity. 

LNG has the potential to be the global energy benchmark of the future, driving the decision-making for investment in the entire energy complex.  To get there the structural deficiencies that hinder liquidity in the market need to be addressed.  The most efficient way to address these is for an independent, neutral central marketplace to build the cornerstones required for market liquidity to thrive.

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Image courtesy of Redwood Markets