Signposts to a robust liquid LNG market

Abstract

The world is experiencing a rapidly evolving energy transition and nowhere is this more evident than the liquefied natural gas (LNG) sector. LNG is delinking from its crude oil heritage and displaying the hallmarks of becoming a global commodity. Europe has largely abandoned the use of oil-linked contracts and the Asia–Pacific region is moving similarly, linking with indices like Henry Hub or the Japan/Korea Marker (JKM) index. New digital trading platforms are emerging that support increased price transparency and lower the barriers to trading. The close-knit LNG ‘club’ is breaking up, and the increased number of market players has amplified the complexity of LNG trade. Other predictable patterns of a maturing market include: • increased spot and short-term contracts; • removal of destination clauses, leading to greater flexibility; • deployment of floating storage regasification units, enabling new delivery options; • greater diversity of market participants; • emerging trading platforms; and • the development of a futures market underpinned by physical trades. Although there seems to be consensus the growing global LNG market needs a better pricing mechanism, it is unclear how this transition will unfold. The oil market experienced a similar evolution in the 1970s and 1980s and is an interesting proxy for LNG. However, LNG may be different; the large capital investment and long payback periods are in direct conflict with buyers’ demands for shorter-term, more flexible contracts. This divergence has contributed to a slowdown in final investment decisions and the emerging risk that the market may soon be undersupplied. This paper examines how the oil sector progressed through a similar turbulent period, weathering commodity cycles while remaining an attractive sector for investment. The paper also considers what it will take for investors to have confidence in new LNG projects within the realities of an increasingly liquid and global commodity.