Global gas-on-gas pricing rises due to 'significant' shift in LNG sector: IGU

The share of gas-on-gas pricing in the global market rose by one percentage point in 2020 to reach 49.3%, according to the latest pricing survey by the International Gas Union published July 8.

This, the IGU said, was largely driven by a "significant" shift in LNG imports to gas-on-gas pricing and away from oil indexation.

"The rise in gas-on-gas LNG imports in 2020 reflected another sharp rise in spot LNG cargoes," it said in the report.

The IGU has carried out its closely watched wholesale pricing survey since 2005, with responses covering 98% of total world consumption. Total gas demand in 2020 was 3.943 Tcm, the IGU said.

The rising trend in gas-on-gas pricing in LNG imports was a continuation of the movement over the last three years, it said. "The total gas-on-gas pricing share of LNG imports in 2016 was 25% and in 2020 that had risen to 44%," it said.

"The rise between 2016 and 2018 was all due to rising spot LNG imports, while in 2019 the increase was partly spot LNG imports and the rush of LNG to Europe's traded markets. In 2020, the increase was due to rising spot LNG cargoes."

The IGU added that the impact of COVID-19 on the global gas market, while stalling LNG demand, did not appear to have slowed the rise in spot LNG imports.

The S&P Global Platts benchmark JKM spot Asian LNG price is also now increasingly referenced in longer-term contracts.

While gas-on-gas pricing globally continues to increase, the IGU said oil indexation retained its share of total global demand at around 18.5% due to a switch toward oil indexation away from regulated pricing in some countries.

China is the largest oil-indexed pipeline gas importer, with imports from Central Asia, Myanmar and, since the end of 2019, from Russia.

In the Asia-Pacific region, Thailand and Singapore imports are also oil indexed, while in Europe, Turkey and Spain are the largest oil-indexed importers, with smaller volumes in Germany and Italy, the IGU said.

European market

A total of 80% of the gas consumed in Europe last year -- or some 430 Bcm -- was priced based on gas-on-gas competition, according to the report, up by two percentage points year on year.

Oil indexation accounted for the remaining 20% of the market, the IGU said, down from 22% in 2019.

"Northwest Europe has seen the most dramatic change in price formation mechanisms," the IGU said, with a complete reversal in the ratio of oil indexation to gas-on-gas pricing.

In 2005, oil indexed gas consumption was 72% of the market, with gas-on-gas pricing accounting for just 28%.

Now, gas-on-gas pricing accounts for 96% of the market in northwest Europe and oil indexation just 4% as a result of increased hub trading and contract renegotiations.

Regulated gas prices remain a constant in the global gas market with a total share of around 28% -- or some 1.116 Tcm of global consumption, the IGU said.

Prices under the bilateral monopoly model, determined by bilateral discussions and agreements between a large seller and a large buyer, accounted for 3.3% of the global total.

They include supplies in the Middle East (Qatar, the UAE, Israel and Iraq) and countries of the former Soviet Union importing gas from Russia, the IGU said.