The winter of 2013-14 offered up a perfect storm of natural gas price spikes and threats to electric reliability. Expect more of the same.
LNG: Desperately Seeking Supply
Several new LNG plants are under construction, but firm supplies remain scarce. Will empty terminals alleviate gas-price pressures?
years. We were in the gas bubble for a few years before we went away from long-term contracts and started buying in the spot market. Now that we are in a supply deficit, utilities and regulators will realize that to make sure the product is available they need to step up and sign long-term contracts for some part of the portfolio.
Fortnightly: Without customers signing long-term contracts, how are LNG suppliers managing price risk?
Dweck: Most suppliers are going to take the price risk, and most projects are being structured on that basis. The importer is taking a small price risk and getting a small benefit, and the supplier is taking almost all the price risk, and the benefit, up and down the LNG chain.
On the other hand we are seeing some producers extending themselves into downstream markets. Gazprom of Russia wants to be everywhere. Angola and Trinidad are looking at re-gas terminals, and Nigeria wants to control transportation in North America. National oil companies are joint venturing with the majors, and the majors will market gas downstream as far as possible.
Zabriskie: Marketing LNG is a bit like chasing your tail. You don’t firm up your marketing until you know about the relative prices between the markets in Asia, North America, and Europe, which is a moving target.
Especially in the early years of this market, the large oil companies will be very comfortable selling gas at indexed prices. As liquefaction chains ramp up, in the 2009 and 2010 time frame, they will make decisions about where to send cargoes. They will gradually sell more gas into the market on a month-ahead basis, and establish relationships downstream of receiving terminals for marketing.
LNG suppliers will wait until the whole chain is operative before getting into long-term off-take contracts for delivered gas. They know their steady customers in time will take a significant part of the volumes they have, on a season-by-season basis.
Felsinger: Looking at it from a different perspective, if you are a country that has natural gas in the ground and you have no local market for it, how do you manage that price risk? When should you bring it to market to get the maximum value? Should you do it now or wait 15 years?
If you want to sell gas to another part of the world, you have to ask whether you want to sell it for a fixed price for a long time, or get a market price. If you look at the consuming markets in the world, in India, Asia, and many European countries, natural gas is priced against a basket of indices. The UK has the National Balancing Point [NBP] and the United States has Henry Hub, and both are very liquid markets.
Different countries are answering the question differently; some would like to sell their gas to Asia, priced against an index tied to oil prices. Others are happy to sell into markets indexed to Henry Hub prices. In every case, it is better to take those market mechanisms than it