Is LNG a global commodity…yet? (from Oil and Gas)

Is LNG a global commodity…yet? Simon Bonini Consultant London The global LNG industry will become increasingly flexible as the number of players willing and able to participate increases and LNG volumes and infrastructure grow. There is certainly a role for intermediaries who have the patience to join in this process. The LNG market will slowly gain liquidity, but LNG will not become a commodity for many years, if ever. Trading trends LNG producers and buyers, as well as international banks and major commodity trading houses, have been monitoring the evolution of LNG trade over the last few years, looking for signs the product is moving towards becoming a commodity. By “commodity,” I mean LNG will have hundreds of buyers and sellers actively executing thousands of trades each day on open exchanges with transparent global prices driven by supply-demand balances. Perhaps, however, it will instead remain a point-to-point industry dominated by principal producers and importing utilities with little need for a clearing market to intermediate. Two areas bear examination in considering the future of LNG trading: 1. The product itself and how easy it is to gain access to it. 2. The underlying nature of destination markets. LNG today does not trade freely in the same way oil, wheat, coal or steel do. Those in the business cannot guarantee that on a given day they will be able to buy even a single additional cargo of LNG. Moreover, there is no liquid marketplace for LNG. Neither physical outcry market nor electronic bulletin boards exist where a would-be buyer and seller could appear and trade. There are also no financial or “paper” markets for LNG. The only way to participate in the LNG market today is by buying and selling the physical product. Any company wishing to become a player in LNG needs to be able to participate in the physical trade, which means gaining access to some part of the logistics chain. Infrastructure access LNG is a cryogenic liquid needing custom-built ships and tanks for transportation and storage and importation via terminals connected to natural gas networks. LNG producers tend to be major international oil and gas companies working in partnership with national oil companies selling their output, typically, under 20-year contracts. The buyers are overwhelmingly Asian or European utilities with large downstream gas and power businesses. Upstream producers, therefore, need the utility buyers’ credit and large dependable physical markets to finance multi-billion dollar upstream production facilities. Until recently a typical LNG export project would deliver to the buyer’s import terminal on a “CIF” basis (carriage, freight, and insurance paid) under a contract that is in essence a point-to-point trade with no alternate delivery possibilities. Production, shipping and stock planning, and coordination and logistics are key components in the buyer and seller’s ability to ensure security and reliability of supply. The LNG supply chain places control of infrastructure exclusively with the buyers and sellers. Shipping, import capacity The rapid growth in the LNG fleet over the past decade (Fig. 1) has created an increasing amount of spare capacity, leaving carriers available for short-term charter. Third parties can use this excess capacity to effect intermediate trades between exporters and importers, and it is in the shipping market that new traders are most active. A trader may charter a vessel for just a few weeks to buy a cargo in, for example, Trinidad and sell it to an Asian buyer, taking ownership of LNG at a jetty in Trinidad and selling it as the LNG leaves the ship at a jetty in South Korea. Gaining access to regasification and storage facilities at an import terminal facilitates trading. The number of terminals in the Americas and Europe with underutilized capacity and no long-term supply contracts has grown. The owners of idle capacity are eager to gain incremental income by making their facilities available to third parties. Market participants have also been re-exporting LNG delivered to the US and Belgium from the Middle East to Asia and the UK. Only a few years ago the lack of sufficient LNG terminal capacity would have made such trades impossible. Only in Europe (including the UK) and the US are regulations in place allowing third parties access to terminals. Pricing A key feature of a true commodity is use of commonly used pricing points. Prices between these points may vary in quality, freight, or other logistical consideration, but they are used by the market at large. Brent or WTI crude oil pricing quotes, for instance, indicate the price of oil globally. LNG’s price, by comparison, varies greatly depending on its destination, thus creating large price disparities between markets. The North American and UK markets have established pipeline gas as a commodity, with the price being settled by balancing supply and demand at particular locations. Abundant shale gas supplies have lowered US natural gas prices at Henry Hub. Long-term contracts that link the price of natural gas to crude oil determine gas pricing in Europe and Asia. LNG can move between these markets, offering considerable gains if the price spreads can be captured. The difference between Henry Hub and Asian gas prices typically runs as high as $5/MMbtu. At the height of the pricing cycle, some LNG producers successfully demanded “oil parity” pricing for their gas, ~$16/MMbtu at $100/bbl, while Henry Hub traded around $6/MMbtu. These differentials are driving the trading community’s interest in LNG and the projects to export US gas as LNG. The future Without question, the LNG industry is moving towards an increasing level of trading and flexibility. And although LNG remains far from being a global commodity, the increased flexibility is valuable to the industry in meeting seasonal demand variations and in buyers and sellers having access to versions of the risk-management products that come with a traded commodity market. The lack of sufficient trading volumes remains the major obstacle to LNG becoming a commodity. Producers continue to sell the bulk of LNG on long-term contracts (Fig. 2) to utilities with formula pricing referenced to oil. The figure shows that 83% of LNG is bought under contracts with physical supply for 15-20 years. The weakening of US gas prices has created opportunities to remarket LNG to alternate customers, mostly in Asia, but this remarketing is so far being carried out by the producers themselves and has not created opportunities for intermediaries. The author Click to EnlargeSimon Bonini ( is currently an independent consultant in international energy. He has more than 25 years’ experience, most recently as director LNG for Centrica, the UK’s largest utility. He has previously served as chief operating officer of 4Gas, Rotterdam, and president of Woodside Natural Gas Inc., Los Angeles. He spent 17 years in various capacities at BG developing its global LNG business, including president of BG Trinidad, president of BG Shipping, and vice-president global LNG. Bonini holds a masters in chemical engineering from the Imperial College at the University of London and an MBA from INSEAD Fontainebleau, France. He is a chartered engineer and a fellow of the Institution of Chemical Engineers.]]>