In 2000, some 96% of LNG was sold to customers under long-term contracts. Contracts are typically signed after the entire value chain from supply to market have been identified and secured. LNG shipping capacity is largely pre-contracted to projects under long-term arrangements. And LNG pricing mechanisms are normally indexed to crude oil or oil products in Asia and to oil products or crude oil in Europe, while, in the US, cargoes are sold using the Henry Hub gas hub as the basis for pricing.
But the LNG market is changing in many ways. And so is the range of opportunities available to buyers and sellers - calling for the need for more creativity, cooperation and risk management.
With markets deregulating and competition for customers increasing, buyers are under increasing pressure to seek more flexible contractual models. Buyers have invested in more shipping than needed to lift the cargoes they have contracted on a long-term basis. While major producers have begun to invest in LNG ships without linkage to source or market. As a result, short-term trading continues to grow strongly and is causing buyers and sellers to re-examine traditional pricing models for LNG. As opportunities for short-term sales increase, buyers and sellers will look for opportunities to optimise shipping capacity. One result of such co-operation is likely to be a much greater degree of transparency both in terms of the prices paid for LNG and of transportation costs.
For LNG sellers, the global trend towards lighter fuels combined with reducing costs of producing LNG are opening a range of new market opportunities in the Atlantic Basin and Asia Pacific. The US remains the world's largest and fungible market and a focus of attention for new LNG sales while the giant Chinese energy market has begun to open its door to LNG with its first import facility. But new opportunities in smaller niche markets like the Dominican Republic have been realized based upon innovative commercial structures and different forms of risk management.
These changes will probably not lead to a globalisation of natural gas markets, since the dominance of traditional long-term deals in current LNG trades means that it will be some years before short-term arrangements or new types of contracts play a major role in the industry. However, the future LNG landscape will reflect a new, creative environment bringing about new risk issues to manage.
At BP we perceive LNG - with its significant contributions to a rapidly growing international gas trade - as a key part of our future as one of the world's largest non-State gas producers and reserve holders. We are an integrated LNG value chain player with a global presence and over 25 years experience in the industry. We are active throughout the value chain.
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