Asian end-users ready to buy LNG at NBP-linked prices

20 September 2016 14:05 Source:ICIS

One major end-user in east Asia is considering the purchase of short-term LNG supply indexed to the British NBP gas hub from next year, with others reporting similar offers, market sources told ICIS.

NBP-linked offers have been prevalent in the spot LNG market in the past year, when LNG prices fell steadily and crude oil was too volatile, sources said.

A few portfolio suppliers that have quoted NBP-linked offers to buyers in the Pacific basin include Anglo-Dutch major Shell, Paris-based Total and UK-based BP, sources said. Other European companies such as ENGIE and Gas Natural Fenosa have also approached buyers in Asia with gas-linked offers, one market source said.

Rather than relying on a largely illiquid and opaque spot market for price indications, sellers and buyers have turned to the NBP, which is deemed liquid enough to provide reliability. Although some portfolio sellers have offered on a link to the Dutch TTF hub, the NBP is still considered the top benchmark in the region.

The British gas hub is also widely deemed a last resort for suppliers to sell into when the LNG market is further saturated with new supply from next year and spot prices could face downward pressure.

“Market participants use NBP as a gauge for LNG pricing, because the gas hub has strong trading liquidity and can act as a floor for LNG,” one end-user in east Asia said.

Most LNG portfolio majors typically have European pipeline gas within their global business, so selling at NBP-linked prices allows them to hedge on the hubs and mitigate risk, a seller said. Traditional large buyers in Asia, on the other hand, typically do not do hedging or risk management like traders or portfolio suppliers, although this is slowly changing as more end-users become sellers.

From the sellers’ perspective, buyers will swing towards any price indexation that makes the most sense for them at that point in time. First, it was snapping up US volumes using Henry Hub futures as an indexation four years ago, then switching to buying at prices linked to the Brent crude oil benchmark. A notable example is Taiwan’s CPC specifying to participants in its mid-term and strip tenders earlier this year that offers should be at around 11% Brent plus a constant.

“LNG market participants are a bunch of lemmings who have a herd mentality,” Andrew Seck, the former head of LNG trading at Uniper in Asia, said at the ESI gas conference on 30 August. “It’s this common belief that spot LNG prices will be cheaper if they choose that index.”

Buyers in Asia may end up having to pay a relatively high constant if they buy at NBP-linked prices, as sellers would factor in the cost of shipping. Asian end-users are also susceptible to Britain’s market fundamentals, with a most recent example being an outage at the Rough long-range gas storage site which triggered a brief local price spike.

The eventual pricing would, more often than not, work out to be largely similar when all the indices are compared, one trader said.

By Xieli Lee