Mixed commercial arts: the future of LNG pricing indexations in Asia

Abstract

This presentation will discuss potential pricing strategies for liquefied natural gas (LNG) sales into Asia. Currently oil-linked contracts make up approximately 85% of all contract volumes for delivery into Asia, carried over from legacy pricing preferences of projects within the Asia–Pacific Basin or the Middle East. The rise of the Henry Hub contract has been a positive disruptor of this trend, and the volatility of the past 3 years, as well as the forward curve of the next 2 years shows the full cost of Henry Hub linked volumes come in below Asian spot price indexation, massively increasing the appeal of the US benchmark in Asia. Our data shows the influence of the Henry Hub will increase materially over the coming years (on account of the pre-final investment decision pipeline being concentrated in North America), potentially making up over 25% of all LNG contracted to Asia by 2030. Faced with the dilemma of choosing a variety of indexations offered by portfolio players, we use Rystad Energy’s Energy Transition research to discuss the competitiveness of different indexations under a range of oil prices, with important implications for expiring and new Australian LNG contracts. The divergence of long-term views on oil-pricing will also keep oil-linkage relevant in Asia for the foreseeable future, although in the event of massive differences from spot LNG prices, we could see risk of more pricing disputes, ‘joker’ amendments to price review clauses, the resurgence of cap and floor prices, and a potentially permanent move towards hub linkage.