On-demand access to accurate pricing data is pivotal for market players in the oil and gas industry to make better and timelier strategic decisions in order to drive their core business activities. Now more than ever, with the production of oil and gas reaching unprecedented new highs, organizations in this industry cannot afford to ignore the anticipated changes in price assessments. To prevent a data management mess, market players need to keep themselves well equipped and informed to proactively incorporate new data into their current business processes.

With the success of the shale gas revolution in North America seeing its effects ripple across the global oil and gas markets, there is an undeniable influence on industry participants’ critical trading and investment decisions. In particular, increasing Liquefied Natural Gas (LNG) supply is countered by ever-increasing Asian demand and the globalization of markets (IGU). As a result, LNG prices are set to divert from an almost half century long oil indexation pricing model and move towards a more competitive one, with major investment and profit opportunities to be captured (Bain). To ensure that market participants do not miss these opportunities, ZE’s end-to-end enterprise data management solution, ZEMA, provides powerful tools to automate the collection of new pricing data from any location, and improve decision making.

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Figure 1: US Natural Gas Production has been undergoing an increasing trend | Data Source: EIA

How Did the Global Market Develop?

The return of North American self-sufficiency in oil and gas production has seen the world’s number one consumer dramatically reassess its import/export policies. As U.S. marketed gas production reached a new high of 70 Bcf/d last year, the world is held in anticipation of a possible initiative to export the abundant resources as LNG (Deloitte). From an investment perspective, there are several cost-saving incentives for advancing LNG projects due to the existing U.S. natural gas infrastructure and technology. The brownfield advantage is of particular interest to Asian markets, as U.S. break even costs for LNG production fall under $5/Mcf, nearly three times less than other global suppliers in East Africa and Australia (Alpha). The current state of the market has paved the way for several opportunities, but capitalizing on them is heavily reliant on the organization’s data management capabilities.

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Figure 2: LNG imports to the US have been decreasing due to increasing domestic production and natural gas stockpiles | Data Source: EIA

Where Does the Data Management Issue Start?

When business critical data is coming from disparate sources and granularities, market participants often spend more time gathering data rather than analyzing it. The current breakdown of regional LNG pricing data is determined from the following oil and gas benchmarks (Deloitte):

  • North America uses Henry Hub as their benchmark
  • Majority of Europe uses fuel oil, Brent, or National Balancing Point (NBP) benchmarks
  • Asia pacific uses Japanese Crude Cocktail (JCC) benchmark

Pricing data is published from price reporting agencies (PRAs), such as Platts, OPIS, and Argus; and exchanges, such as CME, ICE, NYMEX, and NGX. A market player lacking the capability to automatically collect data from these sources limits their analytical scope. This becomes an even greater issue when new data reports are generated for LNG gas hubs, and hybrid indexation pricing is set to increase relative to oil linked pricing.

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Figure 3: ZEMA graph comparing prices at global trading benchmarks for Henry Hub, Brent, and NBP | Data Source: NYMEX

Current oil indexation pricing in Asia uses a conversion factor 16.67% that equates one thousand cubic feet of natural gas to containing 1/6 of the energy content as one barrel of oil (Alpha). Market players can leverage a wide variety of aggregated and normalized futures contract data to calculate both oil and gas linked LNG prices. As Asian energy demands are set to increase heavily in the future, market participants can leverage ZEMA’s data collection and analysis capabilities to make better business decisions based on gas and hybrid indexation.

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Figure 4: Asian LNG prices calculated based on the oil indexation model as shown in the graph. With Asian demand on the rise, prices are set to converge into the gas indexation model | Data Source: NYMEX

What Are the Drivers of the New Price Assessment?

The LNG market is preparing for the next pricing evolution as it shifts focus from traditional oil indexation to a full gas indexation. The end goal of this assessment is to converge prices from Asia and Europe with North America, while simultaneously hedging against volatility with a third, hybrid price model (Bain).  Analysts have attributed this change to the surplus of LNG capacity, which encourages foreign investments and creates a more competitive market. This new market is poised to increase production by 84 million tons per barrel as 12 new liquefaction plants will become operational in the next three years. The additional LNG supply may see a prevalence in short term contract trading and put downward pressure on long term contract prices (Deloitte). The creation of new plants, pipelines, and tankers were the results of promoting innovation through competition, and the first steps towards a global energy market.

ZEMA’s Solution to New Data

Many oil and gas market participants face challenges in collecting the most relevant, reliable, and recent data for their end of day processes. With the most complete data catalog in the industry, ZEMA not only collects from PRA’s and exchanges related to LNG prices, but also has the ability to provide end users with the latest data reports based on the new price indexation model.

With ZEMA, market participants are well equipped with a golden source of data to perform their analysis. To learn more about how ZEMA can empower your organization, visit our website to book a free demonstration.