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Future LNG prices

Future LNG prices

For maritime shipping, worldwide developments are of major importance because LNG fuel costs will be dictated by regional base prices around the world. Many studies project a future global average LNG base price of $10-15/mmBTU.

 

Historical and current long-term LNG contract prices are strongly correlated to the price of oil. Based on a relatively constant projected oil price of $100 per barrel through to 2030, future oil-indexed LNG contracts at prices of $10-15/mmBTU have been used in a range of studies assessing the costs and benefits of LNG as a shipping fuel.

 

Although a gradual migration from oil-linked pricing to spot or hub-based pricing is likely, experts do not expect average spot LNG prices to fall below the cited  $10-15/mmBTU, because the break-even costs of LNG supply are in this price range. However, the possibility of spot gas-linked contracts for North American LNG could upset the traditional pricing structure.

 

A Danish Maritime Authority study focusing on Northern Europe has estimated future LNG prices on the following basis:

  • An HFO price indexed to a reference crude oil price of $100/barrel.
  • Projected relative MGO prices based on the historically strong correlation between MGO and HFO prices. The variance in MGO price is attributed to the rising cost of low-sulphur fuel (2.2 times HFO price), and the relative level in 2012 (1.6 times HFO price).
  • Three different future projections for the LNG market:
    1. Low case: New production comes on line, combined with falling demand, and results in a significant drop in price. There is a glut of LNG supply in the Atlantic basin and more US exports enter the market. It is assumed that the European market is liberalised, which means the oil-gas link no longer holds.
    2. Base case:Prices are expected to weaken in the short term due to low global demand and a glut of LNG. In the midterm, the link between oil and gas prices is expected to remain in place. Continued use of oil-linked contracts is driven by a number of factors such as the greater depth of the traded oil market, enabling better hedging of risks. Timely investment enables supply to remain sufficient to meet growing demand. LNG trading, capacity and storage capacity increase.
    3. High case: The desire of buyers to ensure security of supply means that long-term contracts remain in place. There is limited potential for substitution in energy generation and energy-intensive industries, meaning that demand remains strong despite high prices. Investments in gas production and LNG are not made in a timely fashion and are insufficient to meet continued growth in demand.

 

The results of the analysis are illustrated in the following table, showing LNG price forecasts in comparison to MGO price forecasts. Royal Haskoning used a comparable future cost figure for LNG: 60 - 80% of the HFO price on energy basis.

 

Future price scenarios for shipping fuels (2020-2030); relative prices on energy basis
 scenario nameMGO price levelrelative MGO price compared to HFOabsolute MGO price ($/tonne)LNG price levelrelative LNG price compared to HFOBase LNG price ($/mmBTU)
1Low LNG_central MGOcentral1.61105low0.57.6
2central LNG_central MGOcentral1.61105central0.710.6
3high LNG_central MGOcentral1.61105high0.913.8
4low LNG_high MGOhigh2.21516low0.57.6
5central LNG_high MGOhigh2.21516central0.710.6
6high LNG_high MGOhigh2.21516high0.913.8

Further reading

Two main future market mechanisms

The future price of LNG as a shipping fuel is uncertain. Its price may be indexed to that of oil, as is the case for most current long-term LNG contracts. With growth and increased flexibility in the LNG spot market through development of new infrastructure, however, gas-to-gas competition may become more important in the future.