Many analysts are predicting the worldwide LNG market is changing. That much is clear, if you take panels at the recent IHS CERAWeek conference in Houston as your guide. Andrew Walker, BG Group vice president of LNG, delineated these changes in one panel presentation.
“I think it’s clear,” he said. “As an industry, we’re going toward a more flexible and disaggregated trade in the future.”
He noted that as the industry reaches about the half-century mark of LNG trade, it is entering a period of rapid reformation. For the first 35 years, it remained relatively unchanged, but in the last 15, old models are breaking down in a maturing worldwide market.
LNG trade deals were bilateral “tramline” routes between a clearly defined buyer and seller at a price indexed to oil. Said buyer wanted security of supply, and said seller desired security of market. There was no confusion, he said.
“We are in very much a changed world and that old model doesn’t work, really.”


Roles are evolving; the distinction between buyers and sellers is no longer as clear as it once was. The portfolio player has emerged, along with smaller entrants.
Customized deals
Martin Houston, chairman of Parallax Energy, also said the industry was changing in big ways. He mentioned that pricing will become more bespoke and complex, and customers want smaller parcels for shorter terms. Destination clauses are relaxing.
“While the buyers have all the choices, they have too many choices,” Houston said. “They have choices about destination, they have choices about indexation, and this indexation anxiety, which I’ve spoken about in the past, is really a troublesome issue for long-term buyers. At the same time, sellers are losing some confidence. LNG prices are weakening; are the fundamentals really going to hold up? What does it mean for the long term? And are we going to get this project to market? So we’re seeing some falling off of some supply optimism
"It’s fragmenting,” he continued. “It’s no longer homogeneous; anyone can play, and there’s great opportunity.”
Market trends
As markets mature, greater liquidity generally ensues and hubs develop. One of the questions analysts have been asking for several years now is whether greater flexibility in trade will lead to the development of an Asian hub.
The global spot market grew for the fifth year in a row last year, accounting for 29% of global trade, according to Paris-based International Group of Liquefied Natural Gas Importers (GIIGNL). In 2006, it amounted to only 16%. In that span, LNG trade grew by about 53%, from about 156 million tonnes per annum (mtpa) to 239 mtpa. In other words, overall LNG trade grew at a compound annual growth rate (CAGR) of 4.85%, while spot trade grew about two-and- a-half times faster, about 12.04%.
Moreover, Asia’s growth in the spot trade grew even faster. In 2006, 13.54 million tonnes were imported on a short or spot term basis, while in 2014, that number reached 51.62 million tonnes. That’s a CAGR of about 16%.
Could this be a sign of increasing maturity in the worldwide LNG market?
U.S. LNG projects, which are projected to add to the global LNG supply in the next several years, are taking notice. Cheniere Energy Inc., operator of what will be the first U.S. LNG export project at Sabine Pass, La., noted in a recent analyst day presentation the growing spot and short-term percentages, along with the 37 mtpa of worldwide contracted LNG supplies that are expected to expire from 2018 through 2020. It said it would pursue a medium- and short-term portfolio strategy of 2 mtpa to 9 mtpa in addition to its majority tolling agreements for about 32 mtpa. That will come from a potential nine trains between Sabine Pass LNG and Corpus Christi LNG because the market must adapt to increased volatility and LNG proponents must have more flexibility in their portfolio, according to points taken from that analyst day presentation. This is the world emerging U.S. projects will be entering; it seems to be more questions than certainty, at least in the short term.
FERC approvals
Five projects have been approved for construction by the U.S. Federal Energy Regulatory Commission (FERC).
Sabine Pass LNG, fresh off a FERC a pproval for its fifth and sixth trains, is anticipated to come online later this year and will be the first to add new supplies to the world mix. Upon full buildout, its six trains will produce about 27 mtpa. Cameron LNG, which looks to export 12 mtpa, and possibly more if expansion plans go through, will produce first LNG in 2018.
Freeport LNG, eventually 13.2 mtpa at full buildout, will produce first LNG in 2018.
Corpus Christi LNG, also run by Cheniere, was the latest to be approved and took a financial investment decision in May. Corpus Christi aims to ship 15 mtpa, with first LNG scheduled in 2019. Only the Sabine Pass expansion has not yet received U.S. Department of Energy approval for export to non-free trade agreement nations, generally considered the final major regulatory decision needed for export. Of the many projects left in the North American queue, analysts debate which will next make the leap.
On the East Coast, Cove Point LNG in Maryland is more modest, constructing 5.25 mtpa for export in 2017.
With Asia still set to demand most of the new LNG imports, questions of pricing and flexibility are paramount. One of the questions in the pricing debate that proponents must contend with is whether there will be the development of that proposed Asian hub.
Will there be a hub?
The majority of LNG is still traded on long-term, oil-indexed contracts, a slave to precedent, and while analysts see the market evolving, they are not sure if an Asian hub is in the cards for the short- to medium-term, if at all. Historically, Asian consumers of LNG, with high oil prices and high demand for the last several years, have paid an “Asian premium” for their supplies. An Asian gas hub could help increase transparency and ultimately lower prices.
“There was a lot of talk a few years ago when the price of oil, and the price of LNG, was very high, and Asian buyers wanted something cheaper,” Moody’s Investors Service Senior Vice President Mihoko Manabe told Midstream Business. “They wanted more price transparency, all to reduce the price premium they saw they were paying, so that was the big impetus behind an Asian LNG hub.”
However, despite the obvious benefit for LNG consumers, the creation of an Asian hub holds many challenges.
“In places like Malaysia, Singapore or Japan, there’s been an effort in the past few years to increase the price trans- parency and improve the liquidity of the growing spot LNG market. But I think since then, things have been very slow.”
Last year, an over-the-counter exchange was initiated in Japan, although participation has been slow to pick up.
Many industry observers acknowl- edge that the price of oil-indexed LNG has created a disincentive to explore some Asian hub-based pricing models.
“I think with the fall in pricing, there’s less interest right at the moment,” Neil Beveridge, senior analyst at Bernstein, told Midstream Business.
“Directionally, I think it could happen over time, but I still think it’s a long way off.”
Both Beveridge and Manabe said that one potential hub, Singapore, was too small to serve right now.
Singapore’s LNG capacity includes three tanks, each with 188,000 cubic meters of storage. It awarded an EPC contract for the construction of a fourth tank in 2014, and it expects to complete construction in 2018. As it stands, its storage capacity is enough for about 3.5 average-sized LNG carriers.
Market liquidity
David Hewitt, co-head of global oil and gas equity research at Credit Suisse, told Midstream Business that there wasn’t enough liquidity in Asian markets to support an Asian hub, a sentiment that was echoed by Walker in his comments on a panel at IHS CERAWeek.
“A big question I’ve heard is, are we going to create liquidity?” he asked. “Is there going to be liquidity in the mix? There isn’t at the moment.”
Gordon Shearer of Shearer LNG, on another IHS CERAWeek panel, echoed this sentiment about a lack of liquidity, and added that there’s a lack of flexibility in regulated Asian markets.
“I’m a non-believer in the Asian hub because when you look at the characteristics that exist in the gas hubs we would recognize as traded hubs today, which are basically North America, and effectively the U.S. and Canada, and northwest Europe, there’s real liquidity. The conditions to create those hubs don’t exist in Asia,” he said.
“There’s not a downstream liquid market; I can’t call up as an independent power producer in Korea, China or India and contract for a cargo of LNG to fuel my power plant and get it into the country and operate it, and market my power on the open market. Those conditions just don’t exist,” Shearer said. “There isn’t liquidity; Japan isn’t a single market; it [the “market”] is how many LNG terminals are in Japan, maybe with the exception for the Tokyo ring, but it’s 38 independent little gas markets, and they’re all controlled by a single monopoly.”
Houston said he did not know if there would be one Asian hub. “I think we’re going to see a number of discrete ‘hubettes’, which will have some trading capability.”
Impact on North America
Discussing an Asian hub is a bit like theorizing about the old problem of the chicken and the egg. North American (and Australian) projects coming online create more liquidity in the world market, which in turn could help create conditions for an Asian hub. And if an Asian hub occurs, it will certainly have an impact on markets worldwide.
The question is whether upcoming American and Australian capacity, in combination with Asian demand, market liberalization and rising nontradi- tional contracting will be enough to create the necessary conditions.
If an Asian Hub eventually materializes, it will provide a more stable, depressed price marker for Asian imports. This could make it more difficult for North American, Australian, East African or other potential projects that have a higher cost of LNG production to be economically viable, as well as encourage those that are able to proceed to pursue different contracts than the longer, bilateral ones that are still the norm today.
Additionally, for those projects under construction that already have significant offtake agreements signed—when those contracts run out—Asian buyers may look elsewhere for gas or demand a different price point, buoyed by their own more local hub. Moreover, with a lower import price from the increased transparency a local hub may bring, the evolution of an Asian hub may paradoxically discourage some future high-cost projects.
All of this is a long-term thought experiment, though, if you go back to the analysts. The challenges may be insur- mountable, at least in the short term.
But LNG markets, they are a-changing: shorter terms, smaller amounts, destination flexibility. The question is: will an Asian hub join that new world of LNG trade?

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