New Transparency Exposes State of Global LNG Market

Liquefied natural gas projects are typically opaque, as they are operated by joint ventures that do not need to report the financial details of their operations: some facts leak out through their shareholders' quarterly results statements – mainly when things have gone wrong – but not much more than that.

That explains the huge amount of attention paid to the Sabine Pass projects coming on stream in the US: for the first time ever, all the elements in the chain – the feedstock price, liquefaction costs, shipping and regasification – are either in the public domain or they may be accurately estimated. Chris Schemers, head of origination at BP Gas, said this new standard of openness, enabled by the requirements of regulatory filings and the work of commodity exchanges, would help investors determine where to put their money.

Reflecting on commentators’ repeated failure to guess the arrival in Europe of an “armada” of US LNG, with just “a trickle” coming last year, he told the European Gas Conference in Vienna January 23 that this year could be the turning-point, as merchant players would soon be trading most of the new volume. “We buy, we sell, we sit on a portfolio and we trade that portfolio constantly,” he said – a far cry from the existing model of limited competition.

A consequence of that could be an increase in the churn factor and a doubling of the forward curve at European gas hubs to bring them up to the decade of liquidity on the US Nymex Henry Hub market. Liquidity on the Dutch Title Transfer Facility (TTF) only extends for a few years, he said.

Cheniere Marketing’s vice-president of strategy Andrew Walker agreed, commenting that there was “no smoke and mirrors” distorting his company’s business, whose rate of return was based on that of a utility, rather than the much higher demands of an exploration business. However Cheniere has retained a percentage of the Sabine Pass capacity for trading on its own account, and it has also taken a downstream position in Chile.

Some US liquefaction projects would however likely encounter difficulties where their offtakers were locked into contracts that were out of the money: Wolfgang Peters, formerly CEO of the Czech supply and trading business of German utility RWE, and so familiar with renegotations of one-sided and long-term deals, said that no contract could last where either the buyer or the seller consistently gains at the expense of the other. Unless the risks and rewards are balanced, the relationship will fail and it will end up being decided by arbitration if there is no settlement, he said. In his view, there would not be a single global price but spreads would evolve depending on the supply-demand balance in different regions.

His view was that Russia would be in a strong position if it chose to undercut LNG deliveries to Europe, as there is gas ready to be delivered on take or pay contracts but is not being nominated owing to weaker demand now than when the supply contract was signed. Walker said that there would not be a gas war: Russia would not lower prices too much, and historically the bias had favoured the seller, he said.

Tanker loading at Sabine Pass

(Credit: Cheniere Energy)

Walker also doubted if the LNG market would “commoditise” quickly, with oil indexation suddenly vanishing in favour of spot markets as there are too many inhibitors, he said. However, referring to his days at BG, which is now owned by Shell, he said that the US traders were always the most innovative, and were often baffled by the European way of doing business.

William Powell