26 July 2012 – Crude oil prices have traditionally been linked with those of natural gas, due to their close production association, but an increase in the global gas trade could lead to delinking, states a new report by international energy analyst GlobalData. This change may be driven by the decrease in conventional natural gas production in Europe and the corresponding boost in imports, especially during the winter season.
The Asia-Pacific region is the largest importer of liquefied natural gas (LNG) in the world, but with an increase in competition for LNG supplies, imports into Europe are being increasingly priced against local gas price indexes as the region is increasingly procuring LNG from the spot markets. Demand for LNG in Asia resulted in the development of a spot market and an LNG price index in 2011 – the Japan-Korea Marker (JKM). The continued demand from this region will necessitate more flexible contracts and a greater need for risk management tools in LNG markets, which in turn require the delinking of natural gas and crude oil prices.
The entrance of the US on the LNG export scene, expected in 2015, will also play a key role in this process. Already in the possession of massive import infrastructure, the planned construction of a substantial export infrastructure will mean the US will be able to buy and sell LNG in huge quantities. Cheniere Energy, which plans to export LNG from the Sabine Pass terminal in the US by 2015, already uses Henry Hub pricing for its LNG export contracts. The company estimates that global LNG prices based on oil prices typically range from US$11 to US$23 per million British thermal units (MMBtu), while the cost of delivering from the company’s Sabine Pass terminal to Europe/Americas and Asia ranges from only US$8 to US$10 per MMBtu.
Local market-tied prices are therefore comparatively cheaper than oil-linked prices and would be more attractive to buyers and facilitate the move to a delinked system.