Gas policy shifts divert focus from LNG sea changes

2022 has seen the specter of government interventions envelop gas markets: whether it’s price caps, encouraging benchmark diversification, pooling procurement in a centralized platform or using state-owned banks to directly buy LNG cargoes, all ideas appeared to be on the table.

While pipeline gas and LNG share several fundamental attributes, they are also different in many aspects. In this flurry of policy proposals and announcements, there are significant changes taking place in the LNG industry itself. These changes relate to price indexation, market participation and trade flows.

This piece, as part of a series of articles on LNG industrychanges, will tackle the first point: price indexation. LNG price markers are being used in the spot market, while long-term contracts are still prone to utilizing substitute oil or pipeline gas prices. As substitute prices diverge significantly from the LNG market, a hybrid solution in long-term contracts, combining both mechanisms, is seeing some adoption.

Price indexation

Price benchmarks used in LNG trade have been in great flux over the last 12 months, triggering large changes in relative values between them. While LNG has always been a difficult market to analyze from a pricing perspective, 2022 has seen this complexity deepen.

Here are some broad points to start with, based on data collected by market reporting teams at Platts, part of S&P Global Commodity Insights, and the IHS Connect contract database from January to August:

1. Fixed price trade has globally been in retreat for some time, but North Asia’s usage of fixed prices significantly slumped in 2022;
2. As LNG cargo prices have converged and gas hub prices have diverged an increasing amount of trade referenced LNG-based benchmarks; and
3. Contracts signed for long-term volumes are on course to surpass 2021’s total with ease while crude oil-linked contracts have dropped significantly as a proportion of total trade.

Fixed price trade has dropped to around 43% of total spot and short-term trades, or cargoes for delivery within the next two years or so, in 2022 versus 65% of trade in 2021.

Digging deeper, fixed price trade in North Asia has fallen from 52% in 2021 to under 20% so far in 2022. Fixed prices now largely appear in tenders issued by state-owned companies in South Asia, Thailand, and Argentina. These locations account for 75% of fixed price trades in 2022.

The significant drop in fixed price trades is due to increased market volatility and more developed futures markets.

It has been well documented that LNG prices (JKMPlatts West India MarkerPlatts Northwest EuropePlatts Gulf Coast Marker) have been moving in a tight band while gas hub prices on either side of the Atlantic (represented by Henry Hub and the Dutch Title Transfer Facility, or TTF) have been at record differentials. Added to this, LNG prices have been trading at large discounts to TTF in 2022. Platts Northwest Europe LNG benchmark reached a record discount of $24.475/MMBtu against Dutch TTF on Aug. 26.


It is in this context that the amount of JKM-indexed trade in the spot and short-term market globally increased to some 33% in 2022, more than double the 2021 figure.

Also apparent from this data is that within Europe itself there is greater variety of indexation being used for LNG cargoes. For example, a recent tender issued requested pricing against the French PEG gas hub for 12 cargoes delivered between 2023 and 2025. Activity reported in the Atlantic LNG Market on Close assessment process of S&P Global indicates this, with almost 40% being reported against the UK’s NBP in 2022. There was no NBP-indexed activity reported in the process in 2021.

Pricing Breakdown of DES Europe Atlantic LNG Activity

A peculiarity specific to LNG is the appearance of substitute prices in the long-term contract space. It is also surprising that these substitute prices very rarely appear in the short-term contract space.

Henry Hub and Brent, widely used in long-term contracts ex-US and within Asia respectively, are each used less than 5% in near-term trade.

While Henry Hub has appeared considerably more in long-term Sales and Purchase Agreements (SPAs) in 2022 – largely due to most of the projects seeking a final investment decision being based in North America – Brent-linked long-term contracts have foundered.

According to IHS Connect’s LNG contract database just 0.675 million mt of purely Brent-linked SPAs have been signed so far this year, compared to nearly 18 million mt of such SPAs in 2021.

Companies involved in negotiations for contracts that may conclude on a Brent-linked basis have complained that the relationship between LNG prices and Brent slope levels used in historical contracts has become a moving target.

JK forward curve

Because LNG prices are elevated relative to historical Brent slopes, buyers see a risk in agreeing to contracts now that would leave them at historically high slope levels with a risk of downwards LNG price movement. Sellers also do not want to leave value on the table given the potential to sell LNG in the next few years at considerably higher prices – based on current forward curve values – than historical Brent slope levels would imply.

Term Brent slopes vs LNG pricing converted to Brent slope

After having a reasonably steady relationship for many years the LNG price-Brent term slope relationship started to crack from 2019 onwards. However, the differences between the two have been greatest since 2021.

The few purely Brent-linked term contracts signed this year were agreed in January. Platts has heard of several companies having protracted negotiations for term contracts with a proposed Brent pricing basis, but there is little breakthrough yet on these.

For the few short-term tenders concluded on Brent-linked pricing, from winter season strips of cargoes to agreements for deliveries up to two years ahead, the slopes have reportedly been between 20%-35%. This reflects the difficulty of using substitute price benchmarks, as they do not share the same market fundamentals as the LNG market.

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