Growing global LNG market needs better pricing system to stabilize demand

The expanding world liquefied natural gas (LNG) market requires a better pricing benchmark to facilitate big-ticket investment decisions and stabilize demand, executives said at an industry conference.

LNG has traditionally been sold on long-term contracts indexed to oil prices, rather than being pegged to a natural gas index.

As crude oil prices rise for reasons unrelated to natural gas fundamentals, there is a risk that price-sensitive buyers of LNG will be scared off, according to the executives speaking at the triennial World Gas Conference in Washington.

“The sooner they’re delinked the better,” said Peter Coleman, chief executive of Australia’s Woodside Petroleum, speaking on a keynote panel at the conference while referring to the use of crude oil contracts to benchmark LNG outside the US.

He also said that companies have been building LNG projects based on crude oil forecasts rather than on gas demand. “LNG should be able to stand on its own as its own commodity,” he said.

Jack Fusco, CEO of Cheniere Energy Inc, which exports LNG from the US and pegs its contracts to CME Henry Hub natural gas futures, said benchmarking to oil also risks eroding demand in some cases.

“My fear is that if the price – whether it’s the spot price or the oil index price – gets too high, that [buyers will] look at other forms of energy to meet their needs and we will have real demand destruction,” he said.

With US LNG deliveries now dominating the spot market and North American output set to rise sharply through 2019, some players said they are grateful for the Henry Hub benchmarking option.