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The Asian market: lower need among Asian LNG buyers for index diversifi-
prices and less urgency cation. Over the past few years, Asian buyers have
for index diversification
looked to broaden the basket of indices they use
when securing LNG supply, with a particular push
to move away from oil in favor of Henry Hub–in-

dexed volumes, whose prices became increasin-

By region, Asia has had the world’s fastest growth gly attractive compared with prices for oil-indexed

in demand for natural gas in recent years, with de- volumes when oil was about $100 per barrel. With

mand rising by more than 6% per year for the past oil prices now well below that, and with more un-

five years, surpassing 600 bcm in 2014. Historical- certainty over the competitiveness of U.S. LNG,

ly, Asia has relied heavily on imports to satisfy its Asian buyers have to review their diversification

demand, given relatively limited local production. To strategies.

ensure security of supply, Asian buyers have relied Over the medium to longer term, it seems likely that

principally on long-term contracts, largely indexed if the current oil-price environment persists, it will

to oil prices. The link to oil prices also reflects the enhance the sustainable development of the natu-

region’s growing substitution of natural gas for oil ral-gas market in Asia.

products when this strategy was initiated.

Given the linkage of Asian gas contracts to oil pri-

The European market:ces, the recent fall in oil prices will directly impact
Asian gas prices, pushing them significantly lower.

downward pressure on pricesThis will be increasingly evident in the months ahe-

ad, as existing long-term gas-import contracts are The European natural-gas market has evolved into

indexed to oil with a time lag that ranges between a market with significant liquidity. In 2013, for exam-

6 and 12 months. The impact to date can be seen ple, the volume of gas traded in all of the region’s

in figure 2, which compares the recent evolution of hubs combined exceeded natural-gas demand in

two natural-gas price references in Asia: the avera- those countries by a factor of ten.

ge LNG import price in Japan and northeast Asian Today, most volumes in Europe are indexed to

LNG spot prices. hub prices, which are decoupled from oil prices.

As the figure shows, northeast Asian LNG spot pri- This decoupling was quite evident in 2014, when

ces have already fallen significantly. Natural gas de- oil prices and European natural-gas prices moved

livered under long-term supply contracts, as repre- in largely opposite directions for much of the year.

sented by the average LNG import price in Japan, (figure 3.)

will show increasingly steep declines after the first The relationship between oil prices and natural-gas

quarter of 2015. We expect that if oil prices remain prices has changed significantly in Europe in the

at current levels, Asian LNG import prices will fall to past decade, reflecting an evolution of the inde-

about $7 per MMBtu by mid-2015, reflecting the xation structure of gas contracts in the region. In

fact that long-term contracts’ oil indexation is typi- 2005, about 70% of European natural-gas volumes

cally based on oil’s ave- was indexed to prices of

rage price over the past The relationship between oil prices oil and oil products; by
6 to 12 months. In fact, and natural-gas prices has changed 2013, almost 80% of
current futures pricing is volumes was indexed
already discounting this significantly in Europe in the past to hub prices, with only
decade, reflecting an evolution of the about 20% still indexed
likely price decrease.

Another factor that will indexation structure of gas contracts to prices of oil and oil
weigh on the Asian LNG in the region. In 2005, about 70% of products.
market is planned LNG European natural-gas volumes was This change in Europe-
development projects in indexed to prices of oil and oil products; an market structure is a
Australia and Papua New by 2013 direct consequence of

Guinea, which could in- several rounds of rene-

troduce roughly 90 bcm gotiations between Eu-

per year to the market. ropean midstream play-

This added volume will increase downward pres- ers (including E.ON, RWE, GDF Suez, and Eni) and

sure on prices; it will also reduce Asian buyers’ in- their main natural-gas suppliers (such as Gazprom,

centive to integrate upstream. We expect, however, Statoil, GasTerra, and Sonatrach). This effort was

that there will be delays of approximately two years undertaken several years ago by midstream play-

in the launch of many of these projects, which will ers with the goal of adapting their supply portfolios

give the market time to balance supply and de- to the prevailing gas-market environment. The ef-

mand in advance of this added pressure on prices. fort remains in progress, so we expect hub-based

A key near-term effect of lower oil prices—and one indexation in Europe to continue to increase.

that could remain in place over the longer term if For European natural-gas contracts that remain in-

oil prices stay low—is a reduction in the perceived dexed to oil prices, the decline in the price of oil

32 Impiantistica Italiana - Maggio-Giugno 2015