Research Paper on Fluctuations of (Liquefied Natural Gas) LNG Prices

Last few years have revealed that there is a divergence in the gas prices at a regional scale that is caused by the supply and demand factors and events such as European financial crises, US shale gas boom and Fukushima nuclear crises. There has been a compliment in the oil and natural gas prices from the energy equivalency basis. LNG status quo is challenged by the advent of new potential sources of supply that are emerging as the replacement by the Asian buyers from relatively expensive and long-standing gas pricing as it is tied explicitly to the oil prices.

There are long-term agreements for the development of LNG development costs that have been based historically on the prices of oil. Recently, oil-indexed LNG contracts have resulted in higher prices for LNG.  LNG market experiences the inherent conflict because of more expensive projects that are sold to the price-sensitive buyers.

The traditional approach for LNG pricing that is oil-indexation has been strained by the low prices of natural gas and high prices of oil. It is argued by the LNG project developers that the contracts that are based on the current low natural gas prices do not present the appropriate project economics regardless of the assertion of buyers that oil-indexed LNG prices are untenable.

Theoretically, oil-indexation of gas contracts results in greater competition between the sellers, more gas-on-gas competition from new pipeline infrastructure, more price-sensitive buyers and growing energy deregulation.  Also, there is most importantly the increase in spot market liquidity and the availability of exports in LNG that are based on spot prices. It is more difficult for the developers of high-cost projects to manage contracts for protections of returns such that they do not reflect the pressure from the reality of spot-prices.

It is also however realistic to get the assurance that the current LNG supply factors allow achieving the netback after the shipping costs. The contracts that are spot gas based can upset the traditional pricing structure and the pricing attractiveness of Henry Hub plus becomes apparent for both buyers and seller as buyers who are accessing the supply are not linking it to higher oil prices and sellers are gaining margin opportunities.

EU consumers can benefit from the potentials of LNG if there is sufficient infrastructure, the functioning of the liquid gas markets and diversification in short to medium term that allows a competitive alternative to the pipeline gas. Existing energy legislation has been substantially developed in light of the network codes and Third Energy Package. The emergence of the fully functioning internal gas market is possible only with the continued implementation of all the provisions.

Existing LNG terminals have to address Third Energy Package as for the existing pipeline that makes the external entry points to the internal market more flexible and also makes it a regulatory norm to have third-party access. There is need to ensure that the existing terminals have a level playing field as provided by the National Regulatory Authorities. Also, new services have to be introduced in this regard in relation to the new technologies at LNG terminals.