The Future of Global LNG

In a standing room only session on “The Future of Global LNG: The Changing Face of Natural Gas Markets and Pricing,” delegates at the recent IHS CERAWeek listened to industry experts discuss some of the key issues confronting the LNG industry currently including demand uncertainty, supply competition, and whether the traditional oil-indexed LNG supply contracts are likely to change.  

As explained by Chris Holmes, Senior Director, Global Gas and LNG at IHS, who chaired the Wednesday morning Strategy Session, for almost the entirety of the history of the LNG industry in the Asia-Pacific region, LNG supplied under long-term contract has been priced with reference to crude oil.  But now, due to the “shale gale” that has swept through North America and the more than 200 mtpa of proposed LNG export capacity, the traditional oil-indexed pricing structure is coming under pressure with key Asian buyers calling for a change.

So far, however, only one US company, Cheniere Energy, has received the necessary approvals from the US DOE to export LNG to any country in the world and for that reason, delegates were most interested in the presentation of Charif Souki, Chairman of the Board of Directors, CEO, and President, Cheniere Energy, Inc.  After noting how rapidly the LNG industry has changed with growth of shale gas in the United States, Mr. Souki outlined the increased adoption of hub-based pricing structures in favor of legacy oil-link prices. A hub-based pricing system, he argued, will make the market more flexible and responsive to price signals in the market.   According to Mr. Souki, this transition is already underway in Europe where more than 45% of all gas sold was hub-based in 2012, up from 42% in 2011.

Shinichi Kihara, Director for the Agency of Natural Resources as part of the Ministry of Economy, Trade and Industry of Japan, discussed Japan’s position in the LNG market following the Great East Earthquake that led to the shutdown of much of the nation’s nuclear capacity. As a result, Japan has doubled its LNG imports as it continues to assess its policy towards nuclear, which is now under review by the new administration of Prime Minister Shinzo Abe. Mr. Kihara echoed the statements of Mr. Souki regarding a move to more appropriately price LNG and also noted other actions by Japanese companies and policymakers to address high LNG costs—including investments in projects in the United States, Russia, and Mozambique, as well as incentives for new infrastructure domestically.

Yves Vercammen, Global Head of Commodity Trading, Eni, provided background on Eni’s global role in the LNG sector through its shipping business. Mr. Vercammen also discussed the recent discovery and ongoing development of large reserves in Mozambique that Eni is looking to bring to the LNG market. He said that Mozambique’s potential as a source of LNG is equal to that of Australia. Eni is currently developing offshore liquefaction facilities in Mozambique and coordinating with other players onshore to develop the necessary infrastructure to enable future export. Along with the other panelists, Mr. Vercammen commended the move from oil-linked contracts to hub-based pricing indexes that more accurately reflect the cost of LNG supply.