LNG needs new pricing, rules to realise its golden age: Russell

In theory these should be great days for the liquefied natural gas (LNG) industry as new plants are commissioned to supply the clean-burning fuel to energy hungry markets across rapidly developing Asia.

But in reality the industry is facing uncertainty as low prices damage the economics of multi-billion dollar investments and the expected demand growth fails to materialise.

As is normally the case in complex markets, there is no single villain. Rather there are several factors hurting the industry’s fortunes and casting doubts over whether natural gas and LNG will ever see the golden age predicted a few years ago.

The main obstacle for LNG in Asia appears to be price, not just that it’s higher than competing fuels but also the way it’s calculated that does little to boost demand.

Most of the LNG supplied into Asia is priced on long-term contracts, indexed to the price of crude oil. What this means is that LNG prices take longer to adjust to changes in the prices of oil and coal, providing a headstart to competing fuels when utilities make purchasing decisions.

Japan’s total LNG imports, which include both term and spot cargoes, landed at an average cost of $7.78 per million British thermal units (mmBtu) in January, according to official data.

This was down 48 percent from a year ago, which looks like a big drop versus a 34 percent drop in crude oil over the period.

But crude oil’s big price decline was in 2014, when it plunged 48 percent. In contrast, Japan’s LNG prices fell a mere 9.9 percent during that year.

This shows that the drop in the price of LNG paid by the world’s biggest importer of the fuel took far longer to come through than it did for oil.

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