LNG 101: Spot Market Pricing & Economics
Editor’s note: This is the ninth in a 10-part series produced by the Alaska Support Industry Alliance to educate the public about liquefied natural gas.
Spot Market: A public financial market in which financial instruments or commodities are traded for immediate delivery. Spot markets can operate wherever the infrastructure exists to conduct a transaction.
The LNG spot market began to develop in the 1990s. Extra capacity caused by the start-up of new projects and the expiration of old contracts at existing facilities led to LNG cargo becoming available for purchase on a short-term basis. The use of LNG to meet seasonal demand by countries like Spain and Korea also contributed to the growth of the LNG spot market.
Due to the flexibility of the LNG product, the history of its growth in the spot market has been affected by many things including plant shutdowns and natural disasters. Hurricane Katrina and the Fukishima disaster both caused LNG cargoes to be diverted, leading to significant price increases in European gas.
LNG spot trading typically takes place when there is extra capacity in the infrastructure (liquefaction, LNG tankers and regasification facilities) and a large number of players buying on the market.
The LNG spot market is made up of both short-term deals of less than 1 year (though some participants in the LNG market consider anything less than 4 years a “short-term deal”) and trades that involve only one cargo. The LNG spot market is beginning to take a share of the overall LNG trading market, currently about 20 percent of the total. In 2012, the total volume of LNG traded globally was 223 million tons. Some industry analysts are projecting that short-term LNG trade will increase by 11 percent per year through 2015.
Even though there has been significant growth in the LNG spot market, long term contracts still dominate the LNG market since these contracts finance the infrastructure that is required.
In the last few years, the main markets where LNG is traded over the spot-market are the United Kingdom and Asian countries like Japan, Korea, Taiwan and China. The main LNG suppliers for the market have been Qatar, Australia, Indonesia, Trinidad and Nigeria. Some multi-national oil companies and investment banks are developing trading houses in places like London and Houston to serve the LNG spot customers from Europe and Asia.
A snapshot of today’s LNG spot market shows that spot LNG prices are climbing in Asia due to strong winter demand from China, Japan and South Korea. China’s LNG imports are increasing rapidly as several of their new LNG receiving terminals come on line. At the same time, South American demand has decreased. Argentina and Chile are demanding less as they enter into their summer season.
A common contract used in the spot market trade is the “Master LNG sale and purchase agreement” (Master Agreement) accompanied by a “Confirmation notice/memorandum” (Confirmation Notice)
The Master Agreement lays out the terms and conditions of LNG trading with no firm commitment from the seller or the buyer.
The Confirmation Notice is usually attached to the Master Agreement and sets out the purchase and sale of the spot cargo. Details of the Confirmation Notice include price, quantity, LNG ship, arrival time, loading and discharging ports, and other requirements specific to a unique transaction. Once this document is signed it constitutes a binding contract.
One of the benefits of a master agreement that is supplemented by a confirmation notice is the time saved by negotiating a master agreement rather than a one-time sale and purchase contract.
The spot market for LNG may be small relative to the long-term contract market, but it is important because pricing impacts the flow of flexible LNG. The spot market is driven by the LNG supply that is not under contract and LNG that is under long-term contract that has the flexibility to be used against spot prices (cargo diversions).
Many industry analysts believe that the volatility of the spot market will lead to pressure from long-term contract buyers to re-negotiate contract terms for flexibility. But in the short term, LNG spot price volatility is likely to continue.
In our final issue, we’ll look at the outlook for LNG globally, nationally and in Alaska.