LNG Cartel Collapsing

The price of any commodity, such as oil or natural gas always depends on supply and demand. The price for oil around the world also varies based on the quality and composition of the commodity. As an example, Brent crude is currently selling for US $3.00 to US $4.00 higher than West Texas Intermediate (WTI) crude.

The global natural gas market is vastly different from oil market. The United States has significant natural gas resources and an extensive network of pipelines that crisscross the country. The price for natural gas in the United States is currently selling for US $2.50 to US $3.00 per million British thermal unit (mmBtu). Natural gas is now the cheapest fuel to generate electricity in the United States, followed by hydropower, wind, solar, coal and nuclear power.

Europe also has a network of natural gas pipelines crisscrossing the continent. However, the price for natural gas in Europe is currently US $6.50 to $7.50 per mmBtu. The primary sources for Europe’s natural gas include Russia, Norway and liquified natural gas (LNG) from the Middle East. Countries like Japan, Republic of Korea (South Korea) and the People’s Republic of China (PRC) rely heavily on LNG imports to fuel their power plants.

The LNG market began with the development of giant natural gas fields in Northern Sumatra and East Kalimantan in Indonesia, Sarawak Malaysia. Sultanate of Brunei and Qatar. Initially a few countries controlled the flow of LNG to buyers around the world. The limited number of LNG producers were in reality a cartel. As a cartel, the LNG producers maintained a significantly higher price for gas than in the North America or even in Europe.

Over the past twenty years, new giant natural gas discoveries have resulted in new LNG facilities being built in Australia, Algeria, Angola, Egypt, Equatorial Guinea, Nigeria, Sultanate of Oman, Trinidad and the United Arab Emirates. New LNG facilities are also planned for giant natural gas discoveries in Papua New Guinea, countries off the eastern coast of Africa and countries in the eastern Mediterranean Sea. The development of new LNG facilities has created an oversupply of natural gas, causing prices to fall and the cartel to collapse.

In June 2018, India signed a long-term contract to buy LNG at the lowest price in the country’s history. India’s twenty year contract was US $1.50 per mmBtu lower than previous LNG contracts with Qatar. Qatar is one of the largest LNG facilities in the world.

Russia has also dropped LNG contract prices US $1.00 to $1.50 per mmBtu below major LNG facilities in Australia. Four years ago, India only imported LNG from Qatar. Today, India can negotiate short or long-term LNG contracts with Qatar, Russia, Australia or the United States. With more LNG projects coming online over the next few years, it is safe to say that the LNG cartel has collapsed.

Why is this important? In the United States, cheap natural gas has replaced coal-fueled power plants. Natural gas has 30% to 40% less greenhouse gas emissions than coal. Many developing countries with limited financial resources are seeking the most inexpensive fuel to power the growth of their country. Low LNG prices mean developing countries can move to natural gas over coal, reducing greenhouse gas emissions.

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