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?