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International Gas Pricing in Asia: an uncertain future
Professor Jonathan Stern Chairman and Senior Research Fellow
OIES Natural Gas Research Programme
ANCRE 2013
Canberra, October 3-4, 2013
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OIES Natural Gas Research Programme WE ARE:
• A gas research programme at a Recognised Independent Research Centre of
Oxford University, specialising in fossil fuel research
• Probably the only European academic research group focussed on natural
gas.
WE PRODUCE: independent research on national and international gas issues
WE ARE FUNDED BY: sponsorship by 20 companies and governments in gas
producing and consuming countries
WE ARE NOT:
• consultants, sellers of exclusive, high price business reports
Research referred to in this presentation can be downloaded
without charge from our website:
http://www.oxfordenergy.org/gas-programme/
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Original Price Logic: fundamentals, and risk
sharing in long term international gas contracts
ECONOMIC FUNDAMENTALS:
Cost of development and delivery
Financing (loan) and cash flow requirements
MARKET FUNDAMENTALS:
Competing fuels in end use markets
Ability of customers to switch to other fuels
Degree of competition from other suppliers
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Producer took the price risk (via the base price
and indexation); buyer took the market risk
(via the take or pay clause)
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In Continental Europe and LNG-importing
Asia “fundamentals” = oil price linkage
RATIONALE FOR EXPORTERS:
Gas was developed similar to – or along with –
oil
Many gas exporters were also oil exporters
RATIONALE FOR IMPORTERS:
Gas was replacing oil products and crude oil
Prices were set below, and indexed to, oil to
prevent customers from switching (back)
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Common rationale: oil prices were set
elsewhere avoiding suspicion of manipulation
by exporter or importer
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Asian LNG Import Prices are based on
Japanese Crude Oil Import Prices (JCC)
Crude oil was the fuel competing with LNG in Japanese power plants when JCC was invented
Traditional contract negotiations focus on:
the “slope” - how gas prices change in response to crude oil price changes
the “S-curve” – whether there is protection for the buyer at high oil prices and for the seller at low oil prices
Prices reflect the era in which they were signed and this is why the price range is wide
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Concentration has been on price level rather
than price formation
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What was unusual about this?
International and domestic gas prices have
had little in common with the basic
Economics 101 proposition that: the price
of a product should reflect the supply and
demand for that product in the market in
which it is sold BUT….
For several decades (certainly up to 1990)
in most countries these arrangements
were successful and reasonably logical
BUT THEN IN THE LATE 2000s….
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THINGS BEGAN TO CHANGE
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AGENTS OF CHANGE: 2008-13
Global recession
North American shale gas revolution
Oil price increase above $100/bbl
Fukushima nuclear accident and
shut-down of Japanese reactors
Growth of Chinese gas demand and
LNG imports
Growth of short term LNG trade
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Assumption of oil-linked gas prices starts to
unravel first in Europe, next in Asia
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5
10
15
20
25
Jan
-07
Jul-
07
Jan
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Jul-
08
Jan
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Jul-
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Jul-
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Jan
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$/m
mb
tuInternational Gas Prices 2007 – July 2013
Henry Hub
NBP
Europe Oil
Indexed
Contract
estimate:
Asian LNG
Spot
Average Japan LNG
Price
Brent
Source: Platts, EIA, Argus, Rogers/OIES
Before
concessions After
concessions
(estimate)
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Hypothetical US Production-Price Dynamics
Production –
Price
Relationship
Assumed
0
200
400
600
800
1,000
1,200
1,400
2010 2015 2020 2025
bcm
a
$8/mmbtu
$6/mmbtu
$4/mmbtu
1,600 Source: Rogers/OIES, Illustrative Assumptions
LRMC assumption of US dry shale gas is $5-7/MMbtu
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US LNG Export Projects: ~70 Bcm of capacity already
permitted
0
10
20
30
40
50
60
70
80
90
100
2010 2015 2020 2025
BC
MA
As Yet Uncommitted
Aggregator
Asian Buyer
0
10
20
30
40
50
60
70
80
90
100
2010 2015 2020 2025
BC
MA
Assumed Other 2
Assumed Other 1
Lake Charles
Freeport
Sabine Pass
Specific & Assumed Projects
Capacity Ownership
* Assumes BG Retains 100% of Lake Charles
Sources: Company & Media Reports,
Rogers/OIES
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Break-even costs for US LNG in Europe & Asia
5 7
5 7
2
3
2
3 1.5
2
3
4
0.5
0.5
0.5
0.5
0
2
4
6
8
10
12
14
16
Low High Low High
$/m
mb
tu
Re-Gas
Transport
Liquefaction
Henry Hub sustainable price for dry shale gas
Break-Even Price
Source: Henderson/OIES
10.5
12.5
EUROPE ASIA
Some Henry Hub based contracts signed in Asia
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Asian price confusion in the 2010s
Discontent with JCC is growing, both in Japan and elsewhere (especially at oil prices >$100/bbl) BUT…
Uncertainty as to which price formation mechanism is logical: market- or hub-related
Henry Hub/NBP–related pricing has a role but lacks market logic
Huge increase in Asian spot trade invites the possibility of an Asian hub
Singapore is the early hub but growth is limited
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Continued confusion in Asia between price
formation and price level
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Obstacles to an emerging Asian gas hub
Uncertain gas supply/demand fundamentals
in many countries
Lack of liberalised access to pipelines and
LNG terminals
Market dominated by national – often state-
owned – companies and..
Insufficient numbers of alternative
stakeholders of significant size
Nothing will happen quickly, but there is a
progressive rebellion against/rejection of JCC and
a determination to achieve lower price levels
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An Uncertain Future
The dynamics of the “old world” have shifted
and are now unsatisfactory and unsustainable
The “new world” is not yet clear but will
feature an increasing shift to hub pricing –
initially Henry Hub but eventually…
An LNG hub in Asia – Singapore is the starting
point but probably not the long term solution
The transition is likely to be very difficult as
demand for lower prices coincide with high
cost LNG projects coming on stream later this
decade
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Thank You Relevant published research:
The Pricing of Internationally Traded Gas, ed. Jonathan Stern
The Impact of a Globalising Market on Future European Gas Supply and Pricing, Howard Rogers
Natural Gas Price Volatility in North America and the UK – Sofya Alterman
Continental Gas Hubs – Are They Fit For Purpose?
Patrick Heather
The Transition to Hub-Based Pricing in Continental Europe: a response to Sergei Komlev of Gazprom Export, Jonathan Stern & Howard Rogers
The Potential Impact of North American LNG Exports - James Henderson
