Why The Contractual Price Of LNG Is Out Of Sink With The Energy Mix

We have seen the price of Oil half in the last few months. With it the relative prices of the energy mix have also come down. These include Coal, Gas and Fuel Oil. However the exception is the contractual price of LNG.

The pricing for the obligated volumes is set through twenty five year contracts. The formula used to establish prices favours the seller because historically the price of Oil has been high. The formula is linked. A typical contractual price is $13 / MMBTu at the moment.

Not surprisingly those buyers in these long term contracts are pressing for changes. The flip side of the situation is such that if you are buying cargoes on the spot market IE out of contract – then you are paying around $6 / MMBTu less, an enormous saving.

This leads to several questions; With the arrival of new projects, will the new contracts represent more fair value for the buyers? Also if the price of Oil remains low, when will contractual volumes become less expensive?

The above may come as a surprise to those getting to grips with LNG, it is becoming more mainstream but the indices contributing to pricing is old. It will be fascinating to watch the dynamic changes to the LNG industry. If you would like to discuss LNG and other related commodities do get in touch.

Christopher Wethered – Commodity Resourcing