British Gas Controversially Increases Its Energy Prices

Intensified competition between Russian gas giant Gazprom and Russian gas independent Novatek is showcasing the advantages to producers of LNG pricing flexibility, according to Eurasia Group Global Energy and Natural Resources analyst Leslie Palti-Guzman.

Natural gas analysts frequently point out that there are three different pricing regions for gas – North America, Europe and Asia. And as LNG trade expands to capture a larger share of the global natural gas market, some level of price convergence seems likely.

There is no consensus at present on the rate or the degree of that convergence. But clear markers of change in the structure of natural gas sales and purchase agreements have already emerged in the US, where companies like Cheniere Energy offer LNG prices linked to US benchmark Henry Hub, and more recently in Russia, where Novatek is offering its clients tailor-made LNG pricing.

Gazprom, which has long held a monopoly on natural gas exports from Russia, suffered a blow last month with the announcement that other producers – such as Novatek – would be allowed to compete in the export market. And Novatek is displaying flexibility in LNG contract pricing terms for buyers, which is giving the smaller company an edge over its much larger rival, according to Palti-Guzman.

Gazprom has yet to secure firm long-term sales and purchase agreements for its $13.5 billion Vladivostok LNG project. Novatek, on the other hand, has already secured two long-term deals for its $20 billion Yamal LNG project “by offering not only competitive prices but also personalized pricing depending on the customer”, Palti-Guzman said. “CNPC got a lower slope to oil prices while Gas Natural Fenosa obtained hybrid pricing with an indexation to the National Balancing Point Price.”

“As a new entrant in the LNG market, Novatek’s strategy is to beat the competition by accepting a lower return on investment and by offering creative and personalized pricing formulas to lure buyers away from established producers,” said Palti-Guzman.

“The new pricing strategy by Novatek will increase pressure on Gazprom to also show flexibility.”

Other analysts have noted similar dynamics in North America, where projects offering some link to Henry Hub prices could have an easier time finding buyers for their volumes. Some have posited that for the Chevron-Apache Kitimat LNG project in Canada, sticking to traditional oil-linked pricing in its sales contracts may hamper progress in securing long-term sales and purchase agreements.

For more on this, see Can Kitimat Compete?

Despite high-visibility examples of the evolution of LNG pricing, a broader shift away from oil linkage is  a long way off. Companies like Chevron frequently point to oil-linked pricing as a way for LNG project developers  to guarantee an acceptable rate of return, particularly for greenfield projects with price tags in the tens of $blns. And while flexibility in pricing is attractive to some buyers, it is also new and unfamiliar. Some long-term buyers – especially those that rely on imports for the majority of their gas – may feel more comfortable keeping at least some of their supply pinned to traditional oil-linked prices, at least for the time being.

“Recent market developments suggest that a fundamental change is underway in gas pricing,” but “a complete move away from oil indexation will be gradual”, Palti-Guzman said.