INTERVIEW: Spot LNG price surge a short-term phenomenon exacerbated by post-COVID-19 demand: Tellurian

The surge in spot LNG prices reflects a supply shortage driven by underinvestment and misinterpretation of energy transition goals, and has been exacerbated by a sharp post-COVID-19 rebound in demand, Martin Houston, vice chairman of Tellurian, said in an interview, adding that current prices will not last.

"I'm going to say we take a look at the forward curve, [which] is pricing what [the market] thinks TTF and JKM will be going forward," the senior executive of US LNG developer Tellurian said, adding that high spot prices were "a short-term phenomenon."

The Platts JKM price for spot LNG delivered to North Asia hit an all-time high of more than $56/MMBtu recently before easing to current levels of just over $30/MMBtu. December JKM was assessed at $30.93/MMBtu on Oct. 28.

Houston said the record prices were caused by a dramatic rebound in global gas demand and lagging investment in new supply capacity, arising from a broad-based misinterpretation of the energy pathway to a low carbon future.

"Some people got confused by low prices [in 2020] that was always going to be a temporary situation – the world was not going to stop growing or evolving, the population wasn't going to stop rising," he said.

Investors have been cutting back on new gas supply projects with few final investment decisions taking place, and energy companies have diverted investment dollars to renewables.

Houston said in addition to misplaced energy transition investments that do not take supply security into consideration, indexation to benchmarks that don't reflect market conditions also contributed to market volatility.

New deals

Tellurian has three 10-year LNG supply contracts with Gunvor, Vitol and Shell from the first phase of its Driftwood LNG project, all of which are indexed to a combination of JKM and TTF prices. This is in contrast with other US LNG exporters, such as Cheniere Energy, which sold most of its LNG on the basis of Henry Hub plus a tolling fee and liquefaction costs.

In a high spot price environment, buyers have been more than willing to revert to the safety of oil indexation and cost-plus Henry Hub pricing. However, suppliers who are still largely selling on the basis of oil-indexed contracts have not always responded to high prices by opening the taps.

"This is a fickle market that responds to short-term variations as we have seen with spot prices in the early COVID-19 days," Houston said.

"And the way the market has turned today, people will make short-term decisions, but they make decisions they need to make," he said. "The industry has always been commercially irrational to a degree, right from the get-go," he added.

Houston said at the S&P Global Platts Asia LNG and Hydrogen Gas Markets Conference on Oct. 26 that indexation to oil and to Henry Hub has no bearing whatsoever on local markets and caused some of the increased volatility seen recently.

"There are two things at work here – one is the cost of production and the other is the price the buyers pay. Just because it costs you so much to make something doesn't mean you are going to sell it for that price," Houston said.

He said because the manufacturing cost for LNG varies from producer to producer, whether they sell it on an index of oil, or some other basis, will change the price significantly. Tellurian has chosen to sell it at the market price, "which in Europe is TTF and which in Asia we believe is JKM," Houston said.

Some market participants have criticized oil indexation saying that it leads to crude prices dictating whether LNG producers increase or decrease output, regardless of actual supply and demand of natural gas, exacerbating imbalance and inefficiency in the market.

More 'common sense'

Houston said at the conference that the current crisis should be a warning for the industry "because we didn't heed it the first time around and here we are with prices which are unprecedented and certainly unbelievable."

"If we demonize this industry much more and if we take away the capital in the industry, we will cut supply, demand will continue to increase and ultimately the lights will go out," he said, adding that there was "clearly a conflict between our need to decarbonize and the way we're going about it on a global basis."

"All gas markets are totally linked today. 40% of our industry is spot or short. When the US sneezes, Europe and Asia catch a cold, and when Asia demands the medicine, Europe feels the pain," Houston said. "Demand is exceeding supply and that is the long and short of the issue we are facing," he said.

"My plea is for an increased use of common sense about the how and an increased volume of the why [of energy transition]," he added.