Lifting the Lid on Price Revision and Re-Opener Clauses

Transcription

1 Lifting the Lid on Price Revision and Re-Opener Clauses LNG Pricing and Price Review Triggers P R E S E N T E D T O : C5 LT Gas Supply Contracts, Singapore P R E S E N T E D B Y Dan Harris With Léa Grausz and Toby Brown F e b r ua r y 2 7, Copyright 2017 The Brattle Group, Inc.

2 Introduction Focus on: Possible reference points for Asian LNG Pricing; Different Price Review Triggers between Asia and Europe. 1 brattle.com

3 Pricing Asian LNG Remains Problematic 1/2 A fundamental goal of a Price Review is to find a new pricing mechanism that will satisfy Buyers and Sellers; The price formula should: Reflect market conditions quickly and reliably; Be robust against manipulation; Pricing remains a challenge for Asian LNG Contracts: Customs data does not provide an independent measure of value; Oil indexation cannot reflect short-term LNG value; Linking prices to Henry Hub has demonstrated the different dynamics of the US gas market relative to Asia; Questions remain as to whether published indices such as JKM or ICIS Heren East Asia Index are sufficiently liquid and robust. 2 brattle.com

4 Pricing Asian LNG Remains Problematic 2/2 For Japan alone, the difference between spot price and the price paid was worth around $30 billion between Jan 2012 and Dec brattle.com

5 What are the Prospects for LNG Price References in Asia? Market conditions seem favourable for the development of LNG pricing indices: The market is currently long ; The volume of short-term trading has recently increased; In 2015, non long-term LNG trade accounted for 29% of total gross LNG trade; Destination clauses for Japan may be relaxed; More short-term trading creates the possibility for more price reference points; Which price reference points seem to be most promising? 4 brattle.com

6 Possible LNG Price Reference Points 1/2 Source Description Comments Japan OTC Exchange (JOE) Shanghai Oil and Gas Exchange Japan s Ministry of Economy, Trade and Industry (METI) Global LNG Exchange (GLX) Trading of an LNG DES Japan Futures contract listed on NYMEX, cleared through CME Group. Trading hub for spot natural gas, LNG, and petroleum products. METI aims to create an international gas trading hub in Japan by the early 2020s. Auction platform; members to initiate auctions with selected counterparties for the sale or purchase of physical cargoes of LNG. Transacted prices are available to members. Participants are anonymous until a deal is reached. Scheduled start end Q Liquidity yet to be established. Primarily financial (rather than physical) transactions. Promising but a medium-term development. Based on actual transactions concluded. The availability of prices will depend on transactions hence GLX would not be suitable for contract indexation until liquidity was established. Transactions are global so only a sub-set would be relevant. 5 brattle.com

7 Possible LNG Price Reference Points 2/2 Source Description Comments Singapore SGX LNG Index Group (SLInG) DES Japan LNG Index Platts JKM, ICIS Heren EAX Simple average of 20 participants assessments of an FOB Singapore LNG price for a one-month forward delivery window, after excluding outliers (the upper and lower 15% of the assessments). SGX publishes the index once a week. Index published by Rim Intelligence Co. Assessment of the daily DES Japan price based on trades for a one-month forward delivery window in the DES Japan physical market and the JOE. LNG indices based on assessments of LNG cargoes delivered to Japan, Korea, China, published daily. Number of participants is known and relatively large. However, the index is not based on actual transactions. The adjustment for transport costs are not transparent (although SGX is addressing this). In the absence of actual trades, the daily price is based on bids/offers. In the absence of both trades and bids/offers, the price is based on other relevant markets such as the DES Northeast Asia Market. Established indices. Emergence of derivatives based on JKM indicates market confidence in the index. ICIS and Platts indices are very close for most periods. Platts claims that JKM has been adopted as a price reference in LNG Contracts. However, physical trading underlying the index is often thin. Price Assessment by survey is less robust than use of back-office data. 6 brattle.com

8 Challenges to Development of an LNG Index LNG has an inherent problem that trades are lumpy large volumes of gas must be traded to develop reliable pricing; On average there are about 2,800 prompt trades per day on the Dutch TTF market To get this number of LNG trades would imply trading about 230 bcm of gas per day, or 85,000 bcm per year; This is about 260 times world LNG consumption. The most robust solution may be the development of liquid landbased trading hubs in Asia; It will be difficult for an LNG hub to beat the liquidity of a mature landbased hub; In European and US markets, NBP, TTF, Henry Hub etc. are the basis for LNG pricing. 7 brattle.com

9 Possible Land-based hub locations Japan China Australia India For Liberalization starting in 2017 with 3 rd party access to LNG terminals and retail market Existing OTC hub and exchanges are developing Largest LNG importer Large domestic gas market, which is expected to grow significantly LNG imports are expected to grow significantly Large domestic gas market Among the largest LNG exporters Large infrastructure network developed Strong will from authorities to develop trading LNG imports are expected to grow significantly Against Investment in infrastructure may be required Domestic gas consumption is expected to stagnate or decrease Liquidity yet to be established. Authorities are not encouraging liberalization currently Has been a mature gas market for a while now but no liquid hub has emerged yet possible reasons for that are absence of excess gas supply and absence of development of trading contractual practices No current initiative to develop trading Longer terms prospect domestic market is relatively small but is expected to grow (together with LNG imports) 8 brattle.com

10 Alternative LNG Pricing Options Oil LNG Index Land-based hub For Liquid, reliable, established mechanisms Tailor-made, if liquid will reflect the market value of LNG Easier to achieve liquidity; will reflect gas value at the hub. Against Oil prices cannot reflect short-term LNG market dynamics Achieving liquidity difficult due to lumpiness of LNG trading May need infrastructure investment, may need separate hub for each destination. 9 brattle.com

11 Differences Between Asian and European gas Markets Almost every long-term gas supply contract in Europe has undergone a price review since 2009; The experience of the European gas industry is interesting for Asia, but important differences remain in terms of circumstances that can trigger price reviews; One example is the role of the electricity sector in price reviews. 10 brattle.com

12 Will Coal Prices Trigger Price Reviews in Asia? 11 brattle.com

13 But the effect of coal has been different in Europe and Asia 1/2 In Europe, renewables have squeezed the space left for thermal generation 12 brattle.com

14 But the effect of coal has been different in Europe and Asia 2/2 In Europe, CCGTs are running at low load factors Asian CCGT LFs remain relatively high Japanese CCGT LFs forecast to remain high even after Nuclear restarts (2020) 13 brattle.com

15 Concluding Remarks The usual role of a price review is to find a new formula that will reflect the current and future value of the gas; This remains challenging for Asian LNG; A number of interesting initiatives have emerged for LNG pricing, but they remain untested in large contracts; Developing a liquid LNG index is inherently challenging Land-based hubs offer the promise of greater liquidity, but may take time to develop; Europe can offer interesting experience for Asian price reviews, but the drivers of value often differ. 14 brattle.com

16 Presenter Information Dan Harris DAN HARRIS Principal Rome Mr. Dan Harris is a principal based in Rome, Italy and an expert in the economics of gas and electricity markets. He has been involved in client engagements across the full spectrum of the energy industry and his clients include energy regulators, competition authorities, gas and electricity network companies, gas buyers and sellers, and electricity generators. He has acted as an expert in gas contract disputes during both the negotiation and arbitration phases, and has contributed testimony on damages in the context of International Chamber of Commerce (ICC) and International Centre for Settlement of Investment Disputes (ICSID) arbitrations. 15 brattle.com

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21 Back Up Slides: Rise in Short-term Trading Source: IGU World Gas LNG Report 2016, p brattle.com