WASHINGTON: The growing world liquefied natural gas market requires a better pricing benchmark to facilitate big-ticket investment decisions and stabilise demand, executives said on Tuesday at an industry conference in Washington.
LNG has traditionally been sold on long-term contracts indexed to oil prices, rather than being pegged to a natural gas index.
As crude oil prices rise for reasons unrelated to natural gas fundamentals, there is a risk that price-sensitive buyers of LNG will be scared off, according to the executives speaking at the triennial World Gas Conference.
“The sooner they’re delinked, the better,” said Peter Coleman, chief executive of Australia’s Woodside Petroleum, speaking on a keynote panel at the conference, and referring to the use of crude oil contracts to benchmark LNG outside the United States.
He also said companies have been building LNG projects based on the crude oil forecasts rather than on gas demand: “LNG should be able to stand on its own as its own commodity,” he said.
Jack Fusco, the Chief Executive of Cheniere Energy Inc which exports LNG from the United States and pegs its contracts to CME Henry Hub natural gas futures, said benchmarking to oil also risked eroding demand in some cases.
“My fear is that if the price – whether it’s the spot price or the oil index price – gets too high, that (buyers will) look at other forms of energy to meet their needs and we will have real demand destruction,” he said.
He said most LNG customers are managing volatility themselves by blending oil-linked contracts with Cheniere’s Henry Hub-linked deals, and said he does not expect the oil-link to decouple any time soon.
Seung-Il Cheong, the chief executive of Korea Gas Corp, said only that his company, a major LNG buyer, is looking at several contracting options.
With U.S. LNG deliveries now dominating the spot market and North American output set to rise sharply through 2019, some players said they were grateful for the Henry Hub benchmarking option.
“I don’t understand the (oil-gas) correlation anymore. It makes no sense,” said Charif Souki, chairman of Tellurian Inc, which is developing an US LNG facility. “At the moment, if I had to connect gas prices to oil prices, I would be in fear.”