LAUNCESTON: It’s probably not quite here yet, but the trend is unmistakable; the world is moving to a globally-linked natural gas market and the rise of liquefied natural gas (LNG) is the key driver.
Much of the increase in LNG capacity is because of the rapid boost to plants in Australia and the United States, as both countries take advantage of abundant local reserves of natural gas to muscle in on a market that until recently had been dominated by a few established producers and buyers.
But it is perhaps ironic that while the action on the capacity side of LNG is an Australian and American story, the ultimate controlling player of the emerging global natural gas market is likely to be Europe.
This is because Europe is likely to act as a “clearing house” for surplus LNG cargoes, given it has excess re-gasification capacity and the ability to use the fuel for a variety of purposes, from power generation to manufacturing to household heating.
Europe is also the only region that can effectively arbitrage between LNG and pipeline prices, given its connection to Russian and other Eastern natural gas via pipelines.
The continent is also best-placed to use market forces to find a price level for natural gas versus its competitors, given it still has substantial coal-fired power in some countries as well as being a leader in renewables such as wind and solar.
To understand Europe’s role in the LNG market, it’s worth examining how the dynamics of trade in the super-chilled fuel are changing with the rise of Australia and the United States.
LNG has traditionally been an opaque and tightly-controlled market, where a small number of exporters signed long-term, oil-linked contracts with an equally small number of buyers, who were more concerned about energy security than price.
The major producers included Qatar, Indonesia and Malaysia, while the top buyers were concentrated in North Asia, namely Japan and South Korea, and also in Europe.