Over the years, gas prices have reached many extremes in various corners of the world, but this could be a thing of the past as an expanding and more independently priced liquefied natural gas (LNG) market helps global prices converge.
LNG used to be a means to bring stranded gas to market, now it is linking the world’s biggest and lowest cost market in North America to the rest of the world. This is allowing the impact of the US shale revolution to filter through to gas markets everywhere, helped by new floating regasification technology. At the same time, international traded volumes have risen, as has independent pricing and market interconnectivity, leaving prices more equal across the world today than for some time (see chart).
Earlier this year, at the end of winter, gas prices at the Russian border and in the Northeast Asian LNG market were identical at $5.85/mmbtu, while US prices at around $3/mmbtu brought up the rear – most others were somewhere in between, illustrating the relatively narrow global price range.
This contrasts sharply with the situation only a few years ago, when prices in different regions varied substantially as regional fundamentals pulled in different directions. In the US shale gas was already putting downward pressure on prices by 2011, but LNG markets were very much tighter, and import prices to Japan ballooned by as much as 80% following the March 2011 Fukushima nuclear disaster, which pushed up demand for LNG sharply.
Highest and lowest
In the past, local fundamentals, strategic considerations and the degree to which gas prices were linked to crude has impacted relative regional price averages, while spot LNG and other market prices often trended well above or below the typical price being paid in an area. The highest sustained prices over recent years have been for Japanese spot purchases after Fukushima and crude linked deals during the highest crude price periods, which pushed LNG prices towards $20/mmbtu in 2008 and 2013.
In the pre-shale era, the lowest prices used to be from Russia and the former Soviet Union to neighbouring countries – which continues to generate tension as Gazprom completes moves to bring its prices into line with international markets. Low prices also used to occur in gas-rich areas with little demand, such as parts of Indonesia or Malaysia, at levels around $2/mmbtu – which often provided the raw material for LNG exports.
Some of these low-priced pockets still exist (including Qatar), but now the lowest prices are also prevalent in the world’s biggest market in North America. So now, rather than being between Russia and its allies, some of the lowest cross border gas sales in the world are US exports to Mexico – ironic considering Mexico had often accused the US of exploiting its energy riches.
None of this had been anticipated only a few years ago before the shale gas revolution, when the US had been expected to import LNG. Early LNG term contract price links to Henry Hub failed to anticipate the dramatic price falls ahead, leaving some contracts completely unprofitable. One such deal was done by Repsol in 2007 to supply Mexico’s state power generator, CFE, with 3.2 mmt/yr of LNG from Peru at a discount to Henry Hub until 2026. At the time the benchmark was around $8/mmbtu. Shell took over the (now disputed) contract after it acquired most of Repsol's LNG assets in 2013, but has recently been selling the LNG elsewhere and supplying CFE with US pipeline gas.
Other low prices have occurred in spot markets, where prompt prices may have sunk temporarily to very low levels, often during periods of high wind or other compulsory renewable offtake – when power prices can turn negative. These prompt markets are also where the highest spot prices are seen, normally for very prompt gas during periods of extremely high winter demand and low wind. Prices have frequently crashed through £1.00/therm at the UK’s NBP.
However, here too price extremes have been moderating – as reflected in falling inter-seasonal and daily power price spreads, which have dramatically reduced storage returns across Europe over the last five years. While cold weather did see high LNG spot prices into southern France and Northeast Asia earlier last winter, the days of sustained prices at these levels look unlikely to return anywhere for some time.
Figure 1 – Natural gas prices 2013 -2015 showing regional convergence, a trend that has continued since.
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