LNG Prices a Concern for Exporters

By Matt Loffman, Douglas-Westwood, Houston
 
With so much speculation surrounding the plummeting oil price, the state of the natural gas market has largely taken a backseat. However, gas prices are falling too, but the extent and impact of this varies around the world more than in the case of oil.
 
Natural gas is a fast-growing source of global energy – in their 2015 Outlook for Energy, ExxonMobil forecast gas demand growth to outstrip oil and coal significantly to 2040. In Asia, where the majority of demand growth is expected, we have seen tumbling prices in recent months. 

Spot prices in South East Asia have fallen by as much as 50 percent over the last seven months to around $9/mmbtu at the time of writing, but here is where the story diverges from crude. Existing long-term supply agreements linking gas prices to oil stifle the reaction felt by exporters, while at the same time lead to strenuous renegotiations. The impact of supply agreements – particularly in Asia – exacerbated the decoupling of regional gas prices in 2008/9 where European hubs leant on their greater liquidity and as a result prices rose at a slower rate to 2014.
 
Even with long-term agreements in place, it will be exporters of natural gas, particularly LNG, that are most concerned. In Japan, the highest priced consumer, LNG prices are widely expected to fall to below $13/mmbtu in 2015. In this environment the arbitrage opportunity for Middle Eastern, American or African producers evaporates. 

LNG spot trade is perhaps most-exposed and significant volumes are now traded as spot cargoes – amounting to some 30 percent of the total. Furthermore, Chinese importers have stated their preference for regional production and pipelined imports where the infrastructure is in place – and the infrastructure continues to grow. It’s the LNG exporters that face the most pressure in strenuous times.
 
Natural gas and LNG have a bright future as economies move towards cleaner energy sources. But the next 18 months will be a serious test of the LNG value chain if Asian prices return to European levels once again.