Pricing structures will be crucial in determining the future of LNG exports, according a new report from Ernest Young (EY), Competing for LNG demand: the pricing structure debate.
The report describes the effect potential Canadian and US LNG exports might have on global LNG contract pricing structures.
LNG development costs
"It's one of the most complicated issues for the LNG sector. High LNG development costs have generally required ironclad long-term off-take agreements. And those have historically been oil price based," explained Barry Munro, EY's Canadian Oil and Gas Leader.
However, the main pressing issue is that recent high oil prices have translated to high LNG prices for Asian buyers. These prices are essentially much higher than the current price of North American natural gas suggests should be the case.
Munro added: "We're seeing expensive projects trying to sell to increasingly more price-sensitive buyers. High oil prices and low natural gas prices in North America have strained the traditional approach to LNG pricing. Asian buyers are now looking to modify or possibly replace their long-standing and, in the current environment, expensive pricing model of gas prices tied explicitly to oil prices."
With regard to pricing, LNG developers will have to balance pressures to be competitive with the need to generate sufficient returns.
Henry Hub prices
"Proposed increases in LNG supply have made the traditional oil-linked pricing structure more difficult to justify. We're seeing industry players now explore alternative pricing structures to remain competitive — often referenced to Henry Hub prices," Munro continued.
While initially presenting a challenge to LNG project developers, the move toward Henry Hub pricing may increase buyers' and sellers' choices. It also adds liquidity to markets and allows buyers to hedge financially and physically. Moreover, the move gives suppliers the confidence to sanction projects before securing export contracts.
Ultimately, there will always be competitive pressures from new suppliers, and at the same time, buyers will always look to obtain the lowest cost, least-risky supply, with the explicit understanding that security-of-supply is of high strategic value but comes at a cost.
"Solving the pricing structure puzzle is just one of the many challenges Canadian LNG players must manage to compete for capital. When the price structure is right, both LNG buyers and consumers will win. But remember - we're not the only country looking to establish a LNG export industry. Competition will be fierce," Munro concluded.
Adapted from press release by Katie Woodward
Read the article online at: https://www.lngindustry.com/liquid-natural-gas/04042014/lng_pricing_structures_391/