Trends in natural gas pricing and their effects on traditional contracting structures

This extended abstract analyses the combined disruptive effects of the shale gas boom, the global gas glut, and the worldwide economic crisis on international gas markets. These factors are considered in three major regions of the world: In the competitive and liquid US gas market, increased domestic shale gas production prompted a dramatic decline in US gas prices and ultimately eliminated virtually all demand for new supplies of imported LNG. In Europe, continuing liberalisation in the EU's natural gas end-user and wholesale markets, the growing liquidity of trading hubs across Europe, and the introduction of cheaper spot-gas have fundamentally changed the traditional oil-indexed gas and LNG contracting models. In Asia, changes in buyer sensitivities to supply security and the development of new sources of supply have prompted discounting against traditional oil-based benchmarks and an increase in short-term or more flexible LNG purchases. This extended abstract explores the combined effects of these developing trends in each major region together with the typical responses of buyers and sellers in each market. These effects and reactions introduce associated complexities in this changing-price environment. The authors also explore potential changes in the traditional gas and LNG contracting model and the evolution of related risk allocations, which contracting parties often rely on.