Changing places: Shifting participation and growing intervention in LNG markets

LNG trade flows, pricing bases and relative values all showed significant upheaval during 2022. Market share among companies changed markedly, too, while market intervention from previously hands-off administrations may have the longest-running impact.

The companies that stood to gain most immediately from changes in market dynamics during 2022 were those that had significant offtake via long-term contracts priced against non-LNG-based prices. Invoice values based on these formulas worked out cheaper than where LNG prices settled.

US Gulf Coast LNG liquefaction project developers reaped the greatest benefit from 2022's situation: they signed 51 mt/year worth of LNG sales and purchase agreements versus just 21.75 mt/year in 2021, according to S&P Global Commodity Insights data. US-origin accounted for about 75% of all SPAs in 2022. This enabled many of these projects to get within touching distance of a final investment decision, when just a year prior it seemed unlikely they would gain industry support.

Returning focus to the short-term beneficiaries of 2022's market changes though, here are some numbers: Platts Northwest Europe price benchmark, which reflects delivered-ex-ship LNG prices into the suddenly gas-starved region, averaged $32.738/MMBtu.

Averaging the final day settlement price of Henry Hub¹, multiplying by 115%, adding an assumed take-or-pay (often called liquefaction) fee of $2.75/MMBtu and the average Platts USGC-NWE LNG carrier freight route cost, the total is $12.59/MMBtu during 2022. Platts is part of S&P Global Commodity Insights.

This means, on average, long-term offtakers of USGC LNG could achieve a 160% profit margin for loading their long-term contract cargoes from the US and selling them delivered-ex-ship, or DES, Northwest Europe. USGC-NWE is used as the trade route in the example because the US supplied NWE with 31 million mt out of the 71 million mt imported to the region in 2022 – easily the largest exporting country to Northwest Europe.

While the strategy of using non-LNG-based benchmark as the pricing basis of long-term contracts to supply the LNG spot market was highly profitable in 2022, it is one with associated risks. These risks were realized for buyers in 2020, when 175 cargoes of US LNG were cancelled by offtakers, which would have amounted to some $1.684 billion being paid to US LNG producers by offtakers to not take delivery of these cargoes.

Having access to highly economic long-term offtake in 2022 meant that offtakers, many of whom were portfolio players as most merchant traders remain relatively light on long-term offtake in LNG, also took a larger spot market share. The three largest LNG portfolio players' cumulative $100 billion plus profits for 2022 would certainly have been aided in part by the above phenomenon.

Portfolio players' increased market share can be demonstrated looking at participation figures in Platts APAC Market-on-Close assessment process. As seen below, portfolio players increased their share of activity to 59% in 2022 versus 17% in 2021, while merchant traders saw their share reduce to 25% from 64%.

Merchant traders struggled to maintain their position in the market not only due to a lack of offtake volumes. High flat prices and swinging margin requirements from futures exchanges constrained their activity. These factors are all changing in favor of increased participation from merchant traders, the largest of whom expanded credit facilities when flat prices were higher and now have extra financing firepower.

While companies' market share can change relatively fluidly, policymakers in many geographies have traditionally been cautious in making large market interventions quickly. 2022 saw major changes in this regard: a trend of de-liberalization in wholesale gas and power markets emerged. The European Union, South Korea and Australia all imposed price cap legislation on parts or whole of these markets.

Vocal calls for a price cap began in Europe in September after the most extraordinary day on its wholesale markets: Aug. 26, 2022, when power and gas prices spiked to never-before-seen levels. French month-ahead power reached Eur768/MWh ($766/MWh using the exchange rate at the time) while Dutch TTF hit Eur319.975/MWh.

This day shook European energy ministries, and a steadily growing stream of support for full-scale market intervention followed in the last few months of 2022, resulting in the Market Correction Mechanism (MCM) being agreed Dec. 19, 2022, which could mean Dutch TTF exchange-traded futures in the EU are price capped in 2023. While these discussions were going on, similar policies were being mulled in South Korea on the power market and Australia on gas.

These policies mostly have limited duration and market observers have questioned whether the EU gas price cap, which comes into effect Feb. 15, will be triggered as it is reliant on several factors occurring simultaneously, but a precedent has been set in some of the most liberal-leaning gas and power markets for governments to intervene, and for free marketers this move towards illiberalism is a cause for concern. There is the potential for a rebound effect on LNG cargo markets due to their clear link with downstream markets.

Beyond the direct impact of the market intervention and the ripple effect on other markets, as one of the early adopters of gas and power market liberalization the European Union had sought in recent years to influence other markets to adopt similarly liberal policies; the strength of this position will have been severely diluted after the implementation of the MCM.

The interventions are likely to have further implications for market participation: already in Europe there has been concern that market activity will move off-exchange into the over-the-counter market, and this fear has encouraged some to create "insurance" markets outside the EU.

¹Bullet settles are common in the US natural gas market and have been deployed in the US FOB long-term market, too, removing price risk for the LNG exporter.