CERAWEEK: LNG market debates new benchmarks amid long-term supply needs

Houston — The benchmarks that have typically been used by buyers and sellers to price natural gas along the LNG value chain may see competition from new entrants as trade flows and market dynamics continue to shift.

The discussion at the CERAWeek by IHS Markit energy conference on March 3 was especially timely for Asia.

There, China is vying in the coming years to become the world's biggest importer of LNG and India has big gas ambitions that are expected to support growing LNG imports. That could make room for new pricing hubs to be used in LNG contracting besides traditional ones that include Henry Hub in the US, Dutch TTF in Europe and Platts JKM in Northeast Asia.

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"In the gas world, we are very much used to these price hubs," Denis Bonhomme, vice president of LNG for China at France's Total, said during a panel presentation at the conference. "They provide liquidity and transparency."

Some market participants want new options, he said

"The Chinese authorities clearly want to start similar hubs," Bonhomme said. "It should be called the Chinese marker, since China is the largest buyer of JKM."

While the idea has some traction in the market, there are disadvantages for China, said Jun Bai, vice president of Beijing Gas Group's Research Institute.

"First, China needs further liberalization of the natural gas market," Bai said. "The second is transparency. I think transparency is a big issue in China."

How to publish available capacity and report prices and trades would need to be worked out, Bai said. Financial, legal and regulatory issues also would need to be considered before a regional LNG benchmark in Shanghai could move forward, he said.

With a lot of focus on North America for liquefaction capacity expansion over the next five to 10 years, wide acceptance of benchmarks across the market will be critical to supporting commercial efforts, especially with the long-term contracts that most developers need to finance construction.

US LNG export developers for years have experimented to find the right pricing structure and contract terms to make their projects work financially.

Russia's PAO Novatek is trying to develop a new LNG pricing hub in Kamchatka, Chief Financial Officer Mark Gyetvay said at the conference.

"What we need now is to see more contracts go out there, and I think in our case it will probably be more hybrid based," Gyetvay said. "We all have to listen to the customer. The buyer is really going to determine what terms and conditions they really need to see in the future."

Asia will be a critical source of demand growth, with China, India and the Middle East expected to account for 61% of new gas demand over the next decade, according to a September 2020 outlook by S&P Global Ratings and S&P Global Platts.

That will mean developers will face more pressure from buyers to be flexible on pricing benchmarks and fee terms. India's Gail, a Cheniere Energy foundation customer, pressed that issue at the conference, as Cheniere and other US exporters try to secure new contracts to finance proposed expansions and new terminals.

Anatol Feygin, Cheniere's chief commercial officer, acknowledged that the drop in US feedgas costs in the decade since contracts for the first wave of US terminals were signed has changed the economics for buyers that Cheniere and others are courting to support the second wave of facilities. He said, however, that there has to be a "transparent, reliable fixed-fee" component for Cheniere to be able to finance expansion projects.

Emissions chatter

Market observers see the overriding interest of buyers in energy-thirsty Asian markets as needing to secure large quantities of LNG for decades to come. That could mean these customers are unlikely to show the same level of reluctance over supply chain emissions as their European counterparts.

But the emissions profile of US LNG was a major theme among gas market participants at the conference, and US LNG developers put greater emphasis on proving up the climate bona fides of US-sourced gas.

Operators of North American pipelines and other midstream infrastructure that support liquefaction facilities fear that the investment community's increased emphasis on the energy transition is deterring needed investment in natural gas and LNG development.

"I hate to put it in these terms, but we've done exactly what the Middle East wanted us to do," said Peter Bowden, managing director and global head of energy investment banking at Jefferies. "I mean, we had it. We had North American energy independence. We should have been shouting it from the rooftops, and instead, we've had a giant sucking sound of capital that will ultimately, you know, make us more reliant on, you know, foreign powers for hydrocarbons."