Open Destination

As natural gas takes on an ever-expanding role in Asian energy markets, the traditional practice of sourcing liquefied natural gas (LNG) through long-term, “point-to-point” supply deals at oil-indexed prices is being challenged on several fronts. For one, U.S. exporters are linking the price of their LNG to Henry Hub gas prices. For another, Asian LNG customers, eager to reduce costs in a suddenly glutted LNG market, are working to renegotiate their oil-linked deals, and turning to the LNG spot market, where prices have been attractively low. Fast-changing market dynamics include planned gas pipelines from Siberia to China that may well make the Asian LNG market more like Europe, where LNG competes head-to-head with piped-in gas and with coal. Today, we continue our look at the changing international market and what it means for U.S. and Canadian gas producers and LNG exports.

The international market for liquefied natural gas (LNG) is an inherently risky business where returns depend on paying back huge upfront infrastructure investments with cash flows based on volatile energy prices. Tectonic shifts in the market are giving North American LNG exporters and natural gas producers an opportunity to become pivotal players. The world is on the cusp of an LNG supply glut that may last several years, and the old order of long-term supply contracts with prices indexed to oil is being phased out in favor of a market structure that features more destination flexibility, more spot market sales—and, for U.S. and maybe some Canadian and Mexican LNG exporters—more liquefaction “tolling” deals with LNG prices linked to gas. Today, we continue our look at what these changes mean for the North American energy sector.