The LNG industry as we know it is changing. Countries which once dominated as producers are being challenged by newcomers such as the US, and new markets are opening up at an exponential rate. Reuters reported last month that the world's biggest LNG trader, Royal Dutch Shell, sold into "6 new markets in 2016, compared with a typical rate of 2-3 national buyers".

Jason Feer is the Global Head of Business Intelligence at Poten & Partners. Mr. Feer will be speaking at our LNGgc London event this September. I sat down with Mr. Feer to ask him how LNG  price structures and contracts are changing and what the industry should expect this year.

KNect365 Energy: Last month I read that Shell's Executive Vice President for Gas and Energy Marketing and Trading, Steve Hill, said that LNG term contracts are getting shorter due to new buyers in the market. I have also read that these new buyers can more “risky” when it comes to credit worthiness. Can you give a little bit of background to our readers as to exactly how LNG buyers are changing Globally and why?

Jason Feer: LNG for a long time was a business built around large credit-worthy predominantly Asian utility companies. These well-funded companies were not focused on cost, but more focused on the security of supply. For Japan, Korea, China the main focus was access to reliable supplies. These countries were highly reliable. The new buyers have much lower sovereign debt ratings.

KNect365 Energy: So the traditional LNG buyers have a “history” basically…

Jason Feer: Yes. They are very well known for high reliability. For example if you have a contract with Japan you know they will perform on that contract, “a deal’s a deal”. Period.

New markets such as Pakistan and countries that are likely to become importers like Bangladesh, Ghana, the Philippines have no payment history.

KNect365 Energy: Why are these countries suddenly entering the LNG market?

Jason Feer: The reasons vary. For example the Philippines' domestic gas supplies are depleting so they see future LNG imports as a way to secure energy supplies in the future. Pakistan is switching from other fuels, plus they’re growing and don’t have enough domestic production. Ghana's economy is growing and they need reliable energy supplies. Air pollution is another driver for LNG, for example in Delhi it is a serious problem.

KNect365 Energy: LNG is a huge topic in the shipping industry right now. And seeing how the shipping industry moves 90% of the world’s goods  - do you see that as a major new market for LNG?

Jason Feer: With the new IMO regulations there is optimism that LNG bunkering will become a good source of demand. But it’s chicken and egg. You have to understand that for LNG the supply chain is very specific – you have specific facilities, specific skill sets needed. You need a refrigerated LNG terminal, not like oil markets where a tank is a tank. There are infrastructure requirements. The shipping industry is potentially an interesting market for LNG, but it depends on all of those things I mentioned.

KNect365 Energy:  So, LNG contracts are changing  - can you explain to our readers what this entails?

Jason Feer: Significant changes are happening with LNG contracts. Typically LNG contracts lasted for 20 or so years. But many new entrants and traditional consumers are looking for shorter and more varied contract tenures. Henry Hub is the the US natural gas benchmark and is the basis for most US export contracts. We are also starting to see “hybrid” contracts, a mix of natural gas hub pricing (Henry Hub and or NBP in Europe) and Oil Pricing. We are also seeing more variety in terms of oil benchmarks that are being used. We are seeing interest in moving away from Dated Brent and toward ICE Brent for example, because some market participants believe ICE Brent offers more hedging options.

KNect365 Energy: More supply creates a “buyers market” right? I’ve also seen that countries want the flexibility to resell LNG that they cannot use in their contracts. Why did countries demand 20 year contracts in the past or not allow reselling of LNG?

Jason Feer: The two promises of US LNG were low price and vastly more flexibility.

Your supply is developed as you get signed contracts, it’s a very orderly project development model. You line up contracts, you borrow money, you develop new LNG projects on the basis of demand. You needed 20-year contracts to provide security to the banks that were going to lend money to build new liquefaction projects.

KNect365 Energy: So why the US entering the LNG market, why now? Were they able to access natural gas due to better technology?

Jason Feer: The US has developed its shale resources, and that has led to a huge increase in US gas production and reserves. Around 7 or 8 years ago the upstream industry figured out how to tap large shale gas reserves economically. It was trial and error. A good example showing how sudden this change happened is Cheniere. Cheniere Energy developed the first LNG export terminal in the lower 48 states. But it was originally built as an import terminal. They repurposed it!

Don't miss Jason Feer and over 40 Global experts on LNG at our LNGgc London event this September.

LNGgc London