Asian LNG Pricing On the Cusp of Transformation
OREANDA-NEWS. September 20, 2016.
- Future LNG demand in Asia remains shrouded in uncertainty, and its competitiveness with other fuel sources as well as policymaker decisions across the region will be important swing factors. While there is clear potential for LNG to significantly increase market share in the Asian energy mix, the lack of genuine LNG pricing could in turn hinder the market’s ability to compete effectively with other fuel sources for future demand.
- Gas benchmark prices have been established in both Europe and North America based on interconnected pipe networks, though geographic factors have hindered such development in Asia. In the LNG market, Asia accounts for the lion’s share of global LNG demand, and compared to other regions is relatively more reliant on LNG for its overall gas consumption needs.
- The traditional and outdated oil-linked pricing model is experiencing ever-growing strains, which are unlikely to subside as LNG trade gains critical mass, supply-demand fundamentals evolve and prices continue to diverge.
- Long-term contracts have been an important feature supporting the LNG market’s growth in past years. Spot market pricing and long-term contracts are not mutually-exclusive, but rather complementary, as a more liquid spot market provides the opportunity to price longer-term contracts off market-representative LNG price benchmarks.
- As global LNG supply rises in the coming years, a key challenge will lie in developing new demand centres to absorb incremental volume growth. While this is crucial in underpinning future demand forecasts, greater market fragmentation may also serve as a catalyst in accelerating LNG’s pricing transition.
- The SGX LNG Index Group (Sling) was established in September 2014 to fulfil the market requirement for an accurate and transparent LNG price based on LNG market fundamentals. Pricing is based on expert assessments from a balanced pool of more than 20 physical market participants, under a simple and auditable methodology, aligned with IOSCO principles for financial benchmarks.
- SGX and Energy Market Company (EMC) this week announced the introduction of the second Sling index – the North Asia Sling – which will complement the existing Singapore Sling. The North Asia Sling will serve to enhance transparent LNG price formation in the traditional North Asian demand centre, while the existing Singapore Sling will remain a key reference for the emerging and developing South-East Asian market.
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