Price LNG locally or pay the global piper
LNG is going to play a key role in the coming century's energy mix. Australia should leverage its strength in pricing now before others set it for us.
Australia cannot simply rely on the belief that a strong Chinese economy, or indeed Asian economies, will mean high demand for Australian LNG. Nor can the Australian market place guarantee the best deal and price for Australian LNG exports, given how LNG exports are priced.
By 2020 Australia hopes to be the world’s number one or two exporter of LNG, yet on its current trajectory, Australians will have little or no control over the pricing of their gas.
The global gas market is an emerging one, not a mature or structured one. How we price gas globally is a work in progress, and for Australia not to be at the top table in this discussion leaves our economy vulnerable to mispricing of core commodity assets, in this case LNG, which will result in unstable energy pricing.
Where is the top table though? In terms of pricing policy, it is not the International Gas Union, which was founded in 1931, but the younger, smaller Gas Exporting Countries Forum. Founded in 2001, in Iran of all places, it is permanently housed in Doha, Qatar, with its secretary-general coming from Russia.
Many might say the GECF is just another cartel, or a "gas OPEC” as it has been called. Yet its DNA suggests differently, and its recent market action suggests it is far from any kind of functioning cartel. When US shale gas hit the market in 2009, Qatar diverted LNG bound for the US to Europe, and crashed the price of European gas. Russia, as Europe’s biggest supplier of gas, through its state behemoth Gazprom, felt the brunt of the collapse in the European spot price.
The gas market is still in its infancy, and as more and more reserves are being uncovered the need for a properly designed pricing mechanism grows, with regions differing over what that the mechanism should be.
Russia favours oil-linked gas prices but the UK’s National Balancing Point prices Europe’s gas spot prices lower than oil indexed gas prices and is becoming more widely accepted as an independent benchmark.
In the US, gas is priced via the Henry Hub, which is based on gas delivery to a distribution centre in Louisiana.
But Qatar and Russia, along with the other members of the GECF, are actively looking at new methodologies to price gas globally, because this is what the consumer side of the market now has access to, and is demanding. While Russia prefers oil-linked gas pricing, the European market does not and the pricing mechanism will change.
For Australia’s main buyers of LNG, namely China, Japan and South Korea, LNG export prices use the oil-linked formula. These same buyers also buy gas from GECF members, and as spot market pricing for gas becomes more popular, regional pricing benchmarks will emerge.
This could leave Australia with some of the world’s highest labour costs in producing and developing LNG, along with an uncompetititevely priced Australian dollar from an export point of view, compounded with an oil-linked gas price model which misprices Australia’s LNG exports against emerging global benchmarks.
Australia’s current LNG development cost blowouts in Western Australia will look insignificant by 2020 if Australia is left standing as the biggest exporter of LNG that nobody wants to buy.
Australia still has the potential of US shale gas to contend with. US domestic gas prices are some of the lowest in the world, yet the belief is that if the shale gas boom in the US results in America becoming a net energy exporter, which for the record I do not believe will happen, then LNG exports from the west coast of America could further pressure Australia’s key LNG export markets in Asia. Similarly, should Russia have a gas pricing policy re-think, gas from Sakhalin going to Japan will also further pressure Australia’s LNG export market.
LNG and oil are different in many ways; not least that LNG cannot be stored in tanks. LNG consumers, especially Asia, are looking for new pricing benchmarks which wor in a global market place. Global pricing methodology for LNG is under discussion, and Australia can and should be part of this dialogue.
Since Australia is on track to becoming the world’s biggest LNG exporter, equally, we should be part of the discussion of how we actually price LNG in the global market place.
Sam Barden is a Strategic Market Consultant, Wimpole-International. Barden has worked in the global financial and commodity markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction.