Natural gas prices will stay linked to the price of oil in most parts of the world, despite resistance from Asian and European importers seeking to benefit from a natural gas glut in the US - brokerage Sanford Bernstein says.
Amid a sharp increase in Asia’s consumption of natural gas, a dramatic difference between regional and North American prices has left Asian importers frustrated. The current gas glut in the US, driven by an unconventional extraction technique called hydraulic fracturing, has driven prices down to average $2 to $3 per million British thermal units this year, far below the $13 to $18 level seen in Asia.
In Japan, the world’s top importer of liquefied natural gas (LNG), the gas bill has soared in the wake of the March 2011 Fukushima Daiichi nuclear accident. The country’s leaders have called for an end to oil-linked contracts, arguing that using the US Henry Hub price will create a global gas market, which will gain extra momentum as more LNG from North America, Australia and Africa hits the global market in the coming years. WESTBut major LNG exporters have balked at changing the pricing system, saying it would discourage new investments into costly LNG projects.
“There is no such thing as a global gas market, and we think it is unlikely there ever will be in the next 20 years,” said Neil Beveridge, senior analyst at Sanford Bernstein.
He argues that the costs of transporting and storing gas relative to oil are enormous and that spot trading in LNG is too small to justify a global or even regional gas pricing system.
“In our view, there is little to no chance of any change in the current pricing structure for international pipeline gas or LNG,” said Mr Beveridge.
He shares the view that new LNG projects need oil-linked pricing to work commercially.
“The expansion of gas projects in Australia would not have been possible without the direct linkage between oil and gas prices.”
Besides, most of the LNG sold in Asia is priced based on the prices in a basket of crude oils and sold in contracts running 20 years or more, giving buyers little opportunity to take advantage of declines in natural gas prices elsewhere.
In Europe, however, utilities that import gas via pipeline from Russia, North Africa and Norway under similar long-term contracts are posting huge losses because high oil prices have sent natural gas prices spiking.