Back in the nineties Liquefied Natural Gas (LNG) was typically the confine of regional, illiquid markets.   During that period, LNG was traded between eight exporting countries and eight importing countries, with only 70 vessels in operation. Due to its meager trade volume and illiquidity, LNG contracts had fixed prices and were indexed to oil prices.

Is the LNG Market Moving Towards Consolidation?

Source: ZE

Fast forward two decades and the volume of LNG being traded have quadrupled. There are now 18 exporting countries and 25 importing countries, with many more joining the club every year.

Interestingly, recent news reports are suggesting that LNG could see its prices plunge for the first time in 30 years. This is despite the fact there has been an unprecedented growth in global energy requirements fuelled by developing countries such as India and China.

In a recent ZE Perspective blog, my colleague Yi-Jeng Huang wrote that market participants in Asia were anticipating cheaper Liquefied Petroleum Gas on the horizon. Is it fair to assume therefore that LNG will experience the same fate?

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Figure 1: Global imports show overall reduction in 2012. Source: BG Group; Data source: Waterborne Energy

Not as such. If we dig deeper and make our analysis based on market dynamics; the volume of a traded commodity doesn’t necessarily reflect the trend. For example, LNG trade declined in 2012 for the first time in 30 years, but its average price notched up a little bit during the same period.

This basically trickles down to the demand and supply gap, which is essentially a function of multitude of factors such as economy, relative price of other fuels and existing and forecasted LNG production capacity.

LNG currently has a very wide price spectrum across the globe ranging from 75 cents in Saudi Arabia to $16-$17 in Japan. This varying range in prices opens up an opportunity to make arbitrage money. However logistics behind LNG are costly; it’s expensive to liquefy, transport and then carry out regasification at the destination point. Despite the cost involved, there usually is an arbitrage opportunity based on available infrastructure and the price difference of the two regions. The LNG exporting infrastructure being built at multiple sites in the US will surely endeavor to exploit market conditions, as the market inches closer towards consolidation.

Returning to Japan, the Fukushima nuclear plant disaster forced the country to reduce its reliance on nuclear energy and increase its use of LNG as an offset to meet power demands. The unfolding of events in Japan made it a lucrative market for US natural gas producers to strategically exploit the abundance of LNG and shale gas. In April of this year, the Obama administration cleared $10 billion worth of new exporting facilities during, with 19 more applications still pending.

As per BG Group’s annual report, a UK-based natural gas company, the LNG market still seems promising despite the blip in traded volumes in 2012. The demand side of the market is still very promising; with new import terminals starting up in Singapore, Malaysia and Israel. Even though there is still a significant opportunity for improvement to the present framework, the diversification in importing and exporting countries together with the building of necessary infrastructure means the LNG market is becoming less and less fragmented and more and more systematic.

I work for ZE Power Group and our flagship product the ZEMA suite provides access to the market data from multiple sources including LNG data providers. Utilizing ZEMA, users have the ability to develop analytical insights on commodity markets.