A recent report by analysts at Ernst and Young predicts that the global LNG market will shift away from its current pricing model, tied to international crude oil prices, to more spot or hub-based pricing. The report, “Global LNG: Will new supply and new demand mean new pricing?” explains that strict oil indexation will become less tenable because “From the global supply side, oil is becoming somewhat scarcer while gas is more plentiful,” thus creating the “inherent conflict of persistently-high oil prices and a growing surplus of natural gas.”
More specifically, the report concludes that oil indexation of gas contracts will become more difficult on account of “greater competition between sellers, more price-sensitive buyers, increasing energy deregulation, increasing gas-on-gas competition from new pipeline infrastructure, increasing spot market liquidity, and most importantly, increasing availability of spot- price-based LNG exports. In short, high-cost projects will find it harder to find shelter in bi-lateral contracts and high-cost sellers will struggle to preserve pricing power.”
The United States is in a prime position to benefit from such a market shift on account of existing LNG infrastructure, according to the report.
Do you agree with the findings of this report? How would the predicted pricing model shift in global LNG markets impact the U.S.? Do these findings impact the debate on U.S. LNG exports?
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Natural gas was a byproduct of petroleum drilling and was originally flared for safety. Over the past 30 years, natural gas has established itself in its own right, as a major fuel in North America and also in Europe. As new fracking techniques have significantly increased the resource, lowering costs, and attracting billions of a dollars worth of private sector investment. The Ernst and Young study is correct that petroleum and natural gas markets will separate, and as a result petroleum will rise more steadily since demand will increase faster than new supplies. And I do agree with the report that natural gas markets will evolve regionally. That is because natural gas though has its own challenges in that the delivery infrastructure is not “in place” regionally, and it takes time and billions of dollars to develop ports , pipelines, and end use delivery chain structures. Additionally, within the United States, another drama is in play with US manufacturers wanting domestic natural gas markets contained so they have first access to lower cost energy. And US natural gas pipelines are moving towards full capacity, so obviously the US natural gas producers and their investors want to maximize their off take. In all scenarios, US natural gas prices will increase but just not as fast a petroleum. There is no way, in my opinion, that any scenario will contain US natural gas in our own market. Global pressure and dollars are crying for energy sources. And natural gas — being cleaner, initially at lower cost (not for the long term), and a more reliable delivery chain (once infrastructure is mature) is going to become first a regional commodity, and in the longer term, a global commodity.