Natural Gas and LNG (Liquefied Natural Gas) supply chain; factors affecting the price of

these commodities, the limitations along the supply chain, and their impact on prices.

Emudiaga Fortune Ahwinahwi

User12516490

Governing International Oil & Gas

UEL-SG-7301-46470

12 March 2023

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1.0 INTRODUCTION:

1.1 Natural Gas:

Natural Gas refers to the gases associated with petroleum deposits. The Main

constituent of Natural Gas is Methane which is the first member of the group of Hydrocarbons

called Alkanes with the molecular formula CH4. In addition to Methane, Natural Gas contains

other hydrocarbons like ethane, and propane, as well as water, carbon dioxide, oxygen, nitrogen,

hydrogen sulfide, and even helium. (Hilyard 2012). The Non-hydrocarbons (carbon dioxide,

oxygen, nitrogen, etc) are nonflammable and must be removed from the raw natural gas during

processing. Compared to all other fossil fuels, Natural Gas is considered the most

environmentally friendly as it has the lowest Carbon emission as CO2. (Inkpen and Moffett

2011)

The primary difference between Natural Gas and Oil is Transportability, Oil is a Liquid

that can easily be transported via pipeline, trucks, rail, and ship but Gas is not easily

transportable that’s why Historically Gas Trading has been regional, both Producers and

Consumers has to be at proximity before major investment in Gas Projects is made.

1.2 Liquefied Natural Gas (LNG):

Natural Gas can be liquefied and when this is achieved the transportation issues Natural

Gas has been facing making its trade regional can finally be solved ( Inkpen and Moffett 2011).

The liquefaction process is similar to Refrigerating process. During Liquefaction, Natural Gas is

passed through a heat exchanger where it is cooled to –161ºC turning it into Liquid. Natural gas

has been traded as LNG has made the commodities to be traded globally just like oil. The LNG

market is now Global and like Oil, LNG can be transported via ships from one country to

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another. The LNG value chain follows the following stage; Upstream – Transportation –

Liquefaction -Transportation – Regasification. ( Inkpen and Moffett 2011).

The Upstream stage is the activities for the exploration, development, and production of

the gas. Thereafter the Gas Produced is transported to a Liquefaction plant or facility where the

actual liquefaction takes place. The LNG produced are then transported by special ships to

consuming countries that have regasification facility. The Gas is re-gasified before being used by

the final consumers. Natural Gas is used by industries, for Power Generation and Residential

Buildings.

The Major Suppliers or Producers of Natural gas are Russia, Iran, and Qatar. These three

countries constitute 55% of the world’s natural gas reserves. ( Inkpen and Moffett 2011). Other

Producers are Nigeria, Algeria, UAE, Saudi Arabia, the United States, and some other countries.

The top 10 Major consumers of Natural gas are the United States, Russia Federation, Iran,

Canada, United Kingdom, Japan, Germany, Italy, Saudi Arabia, and China with US and Russia

as the top 2 highest consumers. ( Andrew and Moffett).

Previously Natural Gas Trading has been regional but now the markets are becoming

global. ( Andrew and Moffett). A few Decades ago, Natural Gas and LNG were traded on Long-

term Future contracts where the consumer is guaranteed steady supply and the producer is

guaranteed continuous patronage at a good price for at least 20 years. Currently, in addition to

the Long-Term contracts, Natural Gas and LNG are now also traded on a short-term spot market

basis. Different Regional Markets use different pricing mechanisms to determine the price of

these commodities.

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 LNG has two separate regional markets, the Atlantic Basin and the Asia Pacific. The Asia

Pacific which is the largest of the 2 markets is driven by Japan (the world's largest LNG buyer),

Korea, and Taiwan. The Atlantic Basin is made up of European buyers and the US (Inkpen and

Moffett 2011).

The LNG market is currently considered decoupled because the Regional Markets are

now Global. What this implies is that the consumer and the producer don't need to have

proximity before trading can be successful. In the past, gas fields were only developed only after

securing a nearby market and customer for the gas. Also before investments are made in Gas

projects there must be a ready buyer with the Producer and consumer signing a Long-term future

trading contract of at least 20 years. LNG as a commodity like oil is now been traded on spot

markets Globally. Currently, alongside future contracts, Natural gas, and LNG are traded on a

spot market basis. Buyers can reach out to suppliers in any part of the world to purchase LNG

and the commodity will be delivered as soon as possible through special ships and pipelines.

Haven considered the present state of Global Natural gas and LNG markets, this essay

will go ahead to discuss the Factors influencing the prices of Natural gas and LNG, the

limitations encountered along the supply chain of the commodities, and their effect on the price

as well as trading trends. This essay will be concluded by reflecting on the future trading trends

of Natural Gas and LNG.

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2.0 FACTORS INFLUENCING THE PRICE OF NATURAL GAS AND LNG

In this essay we are going to discuss the factors affecting the price of Natural Gas under

three broad categories; Factors due to location, factors as a result of Technology, and Factors as a

result of Politics.

2.1 Factors due to Location:

Due to location, the following factors affect the price of Natural gas

(i) Regional Market: Traditionally Natural Gas is traded along regional markets and is

subject to localized demand and supply. The Global market for Natural gas can be

simplified into three regional markets; North America, the Pacific, and Europe.

(Inkpen and Moffett 2011). The North American market comprises the United States,

Canada, and Mexico. Pricing in the US is based on the Henry Hub. The Pacific

Region is led by Japan (the highest LNG importer in the 1990s). Natural Gas prices in

the Pacific region are benchmarked with Oil prices. In Europe, different benchmarks

are used for gas pricing but the basic similarity is that natural gas prices are tied to oil

prices. In essence, natural gas price depends on the market in question.

(ii) Type of consumer: The type of consumer also influences the price of Gas. Top gas-

consuming countries like the United States and Russia will have some impact on the

price of Natural gas in their locations. (Inkpen and Moffett 2011)

(iii) Market Conditions: The Market conditions of both the Gas producers and Gas

consumers have some impact on the price of the commodities. On the Demand side,

the Buyer's economic health, and the price of substitutes like petroleum, coal, and

nuclear will have an impact on her demand thereby impacting the price of natural gas

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 in its marketplace. On the supply end, Production capacity, storage, and

transportation facilities will impact the producer's ability to meet up with supply

which has a direct influence on the prices of commodities.

(iv) Delivery costs: The cost at which natural gas and LNG are delivered depends on the

location of both the producing and consuming nations. The closer the nations, the

lower the delivery cost and vice versa (Inkpen and Moffett). Figure 1.0 shows the

estimated cost of LNG ($/MMBtu) delivered from 12 different origination points

around the world to the receiving terminal at Lake Charles, Louisiana (United States).

Figure 1.0. The estimated cost of LNG delivered to Lake Charles, LA ( Inkpen and Moffett

2011)

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2.2 Factors influencing the price of Natural gas as a result of politics:

The political landscape as well as government activities in a country will have some influence on

the price of Natural Gas and LNG in that country.

(i) In the US, federal and state agencies control the price of natural gas at the wellhead

and that regulated the rates that customers paid for gas in the Mid-1980s ( Hilyard

2012).

(ii) Deregulation and restructuring: In the US, the federal authority deregulated and

restructure gas sales through the Natural Gas Policy Act of 1978 (Hilyard 2012).

Before the deregulation, pipelines bought gas from producers and resell to LDCs

(Local Distribution Companies). As a result of the deregulation LDCs and large

customers can buy gas directly from producers, marketers, and brokers. Pipelines

only provide a means of transportation. With this deregulation comes a drop-in price.

(iii) Creation of Gas Market Centers and Hubs. The creation of natural gas market

centers and hubs began in the late 1980s in the United States. (Hilyard 2012) These

developments were a result of natural gas market restructuring and the execution of

FERC Orders. The U.S. market center for natural gas is the Henry Hub. The Henry

Hub has been the pricing point since 1992 for natural gas futures contracts traded on

the NYMEX. Figure 1.1 gives the prominent Gas Hubs around the world

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 Figure 1.1. Gas-to-gas or oil-to-gas pricing? (Inkpen and Moffett)

(iv) Fiscal Regime and Market Structure: The Government policies in a country

determine the fiscal regime of Natural Gas trading as well as the market structure in

that country. There are three business structures typically used in LNG production

and transportation: integrated projects, transfer pricing agreements, and throughput

agreements. The Business structures in a particular region ultimately have an impact

on the price of Natural in that region. ( Inkpen and Moffett 2011)

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2.3 Factors influencing the Price of Natural gas as a result of Technology

I. The Integrated LNG Project

The LNG Project is a complex and highly capital-intensive project comprising a chain of

activities extending from the gas well to the ultimate consumer. The various links in the chain,

are shown in fig 1.2 below

Figure 1.2 The integrated LNG project ( Inkpen and Moffett 2011)

The high cost (capital and operational) involved in the LNG project has an impact on the final

price of Natural Gas and LNG.

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 (a) Upstream: The capital costs involved in the upstream activities of exploration,

development, and production of LNG influence the overall price of the commodities.

(b) Transportation: The cost associated with transporting gas to liquefaction facilities is a

key element in determining the economic competitiveness of LNG projects and

ultimately the price of Natural Gas and LNG.

(c) Liquefaction: Once Natural gas feedstock reaches a liquefaction facility; it enters a series

of processing and storage steps called the LNG train. After the removal of water

condensates and impurities from the natural gas feedstock, The gas is then liquefied by

passing it through a heat exchanger where it is cooled to –161ºC. ( Inkpen and Moffett

2011). Liquefaction is expensive. The High Liquefaction costs of Natural gas have an

impact on the price of the commodities.

(d) Shipping: Once liquefied, LNG must be transported to the market. The LNG is

transported using special ships; g. The Kvaerner-Moss design and the membrane design.

(Inkpen and Moffett 2011). The LNG may be sold under any one of the three major

shipping agreements given below.

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Figure 1.3 Shipping contract terms.( Inkpen and Moffett 2011)

The cost of shipping LNG ultimately affects the overall price of Natural Gas and LNG in the

receiving markets.

(e) Regasification: Shipped LNG is usually received at receiving terminals having a

regasification facility. A typical Regasification facility has a Jetty and Berth for LNG

tankers, storage tanks, and vaporizers. The cost of the Regasification facility will also

lead to an increased cost of the LNG thereby influencing the price.

II. Discovery and development of Unconventional Natural Gas Reserves in the US “ the

shales “.

The technology for producing gas from shale deposits, 'tight' gas deposits, and coalbed

methane has developed to the point where shale resources have been recognized as a

long-term source of reserves. (Mitchel et al 2012). The US Securities and Exchange

Commission (SEC) has accepted ‘proven’ reserves of shale gas as part of a company’s

reserves. With the discovery and development of Unconventional Natural Gas reserves

especially in the US, there has been a drop-in demand for LNG in the US. Also, most

LNG projects have been suspended in the US. With this drop-in demand as a result of

technology, the price of Natural Gas and LNG will decline in the US and other parts of

North America.

2.4 Limitations in the supply Chain of Natural Gas and LNG

According to Al-Haidous et al (2022), the following are some Limitations encountered along

the supply chain of LNG and its impact on price and trading trends

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 (1) Regulatory and Political Problems: The risk of not obtaining official approval and the

potential of government intervention and delays, may decrease the competitiveness of an

LNG Project. This could result in challenges to expanding LNG production due to

governance, legal issues, regulatory structure, and layers of authorization having an

overall effect on the price of LNG.

(2) Safety and Security Issues: Project approval is affected by safety and security concerns,

and they are critical for the profitability of an LNG Project and its survival.

(3) Reliability of New Technology: As the LNG market grows more global, many

businesses rely on New Technology to save money and improve flexibility, safety, and

security. This might lead to increase training expenses and unanticipated problems. With

New technology comes some level of uncertainty which affects the overall profitability of

an LNG Project. The less profitable an LNG Project becomes the more the price drops.

(4) Environmental Concerns: The source of energy required to drive the liquefaction

process and produce LNG is commonly sourced from fossil fuels which result in

GHG( Green House Gas) emissions. GHG emission raises serious environmental

concerns and businesses might start to shift to Hydrogen and Renewable Energy leading

to a decline in LNG Production thereby leading to a decrease in the profitability of LNG

projects. As more companies turn to Hydrogen and Renewable Energy sources, the

profitability of LNG Projects decreases. This will lead to a massive fall in Natural Gas

and LNG Prices.

(5) Production of Boil Off-Gas (BOG): Boil Off-Gas occurs during the storage and

Transportation of LNG. The cost of Removing BOG from the LNG Tanks or re-

liquefaction costs tends to raise the overall cost of LNG Projects. The increased cost

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 affects LNG Project Profitability and has an impact on prices. Operators might want to

increase the price to recoup some of these expenses.

(6) Unexpected Shipping Regulations: LNG operations in international waters are affected

by detailed rules, regulations, agreements, and standards. With LNG Companies spending

more due to these unexpected shipping Regulations, this might lead to an increase in

price to cover these expenses and make a sizeable profit.

3.0 Summary and Conclusion:

3.1 Summary

Natural Gas refers to gases associated with Petroleum Deposits. The Major constituent of

Natural gas is Methane. Liquefied Natural Gas (LNG) is gas turned into Liquid. LNG has

solved the issue of transportability of Natural Gas and has made the commodities to be traded

Globally like crude oil. The Top suppliers of Natural Gas are Russia, Iran, and Qatar while

the top Consumers are the United States, Russia, and Japan.

The Natural Gas and LNG Market is currently decoupled as the once Regional Markets

are now Global. Previously before major investments are done in LNG Projects, there must

be a ready buyer. Natural gas and LNG are traded on future long-term contracts between the

producer and the consumer for at least 20 years. Currently, alongside Future contracts,

Natural Gas and LNG are traded on Short term spot market basis.

There are several factors influencing the price of Natural gas and LNG and there are

some limitations encountered along the supply chain

3.2 Future Trading Trend

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 LNG is gradually transforming the global natural gas industry. In the past, gas fields were

only developed only after securing a nearby market and customer for the gas. That customer

normally signs a long-term purchase agreement that would justify the capital investment in gas

projects and pipelines to move the gas from the field to the market. All of that has changed due

to LNG. LNG is becoming a truly transportable global commodity similar to oil. Tradable LNG

benchmarks will soon join crude oil benchmarks as an essential part of daily business news.

Some factors could have a major impact on LNG Markets; first, the openness in LNG

markets as Major Gas Producers might consider forming an OPEC-like Gas cartel. The growing

developments in shale gas will also have an impact on LNG markets. LNG markets will be

hugely unsettled if large volumes of shale gas are to be discovered in Europe and Asia. Shale gas

developments need little initial capital and can be shut down or suspended when demand drops.

When demand rises, drilling can restart. On the other hand, LNG projects require billions for

initial capital investments for a multi-decade expectation of production. Should demand drop, the

capital has been spent, and much of the production will be locked into long-term sales contracts.

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 REFERENCES

(1) Joseph F. Hilyard (2012): The Oil & Gas Industry-A Non-Technical Guide. Published by

PennWell Corporation 1421 South Sheridan Road Tulsa, Oklahoma 74112-6600 USA

(2) Andrew Inkpen & Michael H. Moffett (2011): The Global Oil & Gas Industry

Management, Strategy & Finance. Publisher, PennWell Corporation 1421 South Sheridan

Road Tulsa, Oklahoma 74112-6600 USA 800.752.9764

(3) Mitchell, J. & Marcel, Valerie & Mitchell, B.. (2012). What Next for the Oil and Gas

Industry? 34. 10-12.

(4) Al-Haidous, S., Al-Breiki, M., Bicer, Y. & Al-Ansari, T. 2022, "Evaluating LNG Supply

Chain Resilience Using SWOT Analysis: The Case of Qatar", Energies, vol. 15, no. 1,

pp. 79.

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