Price Tag - European Commission Seeks to Add Transparency to LNG Market, Prevent Price Spikes

From its origins as a specialized energy source sold under long-term, point-to-point contracts to primarily Asian destinations, LNG has become progressively more commodified as its global reach has spread, with 44 countries now importing it. An increasing proportion of cargoes are destination-flexible and can be sent to the market that offers the best price, and the marginal price of LNG is set by supply and demand factors. The spectrum of commercial players has grown and come to resemble more closely the oil market, with not only international oil companies as major participants but also traders and utility buyers, all of whom are contributing to a vibrant international LNG marketplace. But unlike oil and other established commodities, LNG lacks a global reference or benchmark price, and instead is priced regionally, with the divergence in regional market prices giving rise to very profitable arbitrage opportunities for those controlling both product and ships. In today’s RBN blog, we look at the pricing indices used to make LNG trading decisions and two initiatives being implemented by the European Commission (EC) that are intended to improve price transparency for LNG trades and prevent price spikes in European gas markets through a consortium-purchasing approach.

To make trading decisions, marketers require reliable pricing information. In the last few years, the European Title Transfer Facility (TTF) gas price and Platts Japan Korea Marker (JKM) for delivered ex-ship (DES; meaning that the seller delivers to the buyer at the destination port — also called Delivered At Terminal or DAT) cargoes in Northern Asia have become the indices most frequently used to assess arbitrage possibilities. (For more on TTF’s emergence as a benchmark, see You’re the Best Around.) However, there is a fundamental flaw in the use of TTF as a price determinant for LNG in Europe, as it is a price based on pipeline gas markets, not LNG. Price spikes in TTF in August and September of 2022 gave rise to a disconnect with the prices of LNG cargoes delivered into European terminals, and traders expecting to realize TTF prices for their LNG cargoes had to settle for much lower prices on delivery. The price-reporting publications addressed this disconnect by publishing assessments of DES cargo prices in Northwest and Southern Europe. However, whereas TTF prices reflect actual trades, the reported LNG prices are assessments derived by journalists who poll market participants for their views on prices, supplemented by actual reported trades. Unfortunately, LNG commercial players are typically reluctant to disclose transaction prices. The U.S. Department of Energy (DOE) has ceased publishing LNG export prices from the U.S. — at the request of exporters — and exporters are redacting the price formulae in the sales and purchase agreements (SPAs) they are obliged to file publicly. Attempts to create electronic trading platforms have similarly foundered to date.

The pricing turmoil in European energy markets in 2022 prompted the EC to enact legislation with the dual objectives of (1) establishing a transparent price assessment for LNG cargoes imported into the EU, based on actual transactions, and (2) developing a means of allowing gas users in the EU to make joint purchases of LNG to avoid price spikes resulting from buying frenzies among gas consumers looking to refill underground storage. The EC tasked the Agency for the Cooperation of Energy Regulators (ACER) to execute its new rules, and since January 13, ACER has published daily price assessments under a transparent methodology that was researched and discussed with market participants prior to implementation.