The EU claims that the drop in Russian pipeline gas flows and record high LNG imports have produced anomalies in the present pricing system and hence calls for a new transaction-based benchmark for liquefied (LNG). Brussels is already contemplating new measures, as the 27 member states of the EU negotiate suggestions presented last week to limit rising energy prices and rein in expenses for consumers.
An alternative LNG price benchmark, which market participants could use voluntarily, was recommended by the EU Commission in a paper shared with member states on Wednesday night and published on Thursday. This benchmark would be based on verifiable price assessments for LNG cargo deliveries.
According to the report, “the complementing benchmark would restrict the existing negative influence on price formation owing to [pipeline] infrastructure delays,” which would result in prices that are more in line with those seen in global markets.
Liquefied natural gas (LNG) purchasers typically base their pricing on regional or international price indices, such as the Henry Hub for natural gas prices in the United States or the Japan Korea Marker (JKM) in Asia, with a small spread added to cover the costs of regasification and transferring the gas to the grid.
The Netherlands’ Title Transfer Facility (TTF), which is applicable to both pipeline gas and LNG, and the United Kingdom’s national balancing point serve as industry standards in Europe (NBP). Some in the industry, however, argue that the TTF price can no longer define the real value of LNG in Europe, especially given the rise in imports into the region this year, because it has been so heavily influenced by geopolitical and sentimental factors in addition to supply and demand factors.
GAS IMPORTS ON THE RISE
There has been a significant increase in the importation of liquefied natural gas (LNG) into Europe this year as governments seek to diversify their energy supplies away from Russian gas, the elimination of which would necessitate the delivery of approximately 200 million tonnes of LNG to the continent over the next decade.
Despite the fact that LNG typically costs more than natural gas, this relationship has been inverted in some European hubs due to infrastructure limitations in pipeline networks and varying capacity to receive and process the chilled fuel, resulting in significant price discrepancies.
France, which has no LNG terminals like Germany, has more competitive prices.
“IT WILL NOT TAKE DAYS”
According to a European Union official, the Commission and the Agency for Cooperation of Energy Regulators have already begun developing a new standard (ACER).
The timeframe is not measured in days. Yes, it’s going to take time, but I believe we can speed things up a little,” the official stated. However, there are still sceptics in the market. According to Hans van Cleef, senior energy economist at ABN Amro, “the TTF is still – by far – the most liquid gas market in Europe and thus most representative.” Liquidity in the TTF markets will decrease if LNG is filtered out, increasing the likelihood of greater price swings due to increased volatility.
However, according to Anise Ganbold, a senior analyst at Aurora Energy Research, reducing the price of gas by moving away from or reforming the TTF could have unintended consequences, such as reducing incentives to increase gas supply or decrease consumption.
There are concerns that a new index may not be widely adopted, according to Independent Commodity Intelligence Services (ICIS), which has been studying and pricing European gas markets for decades. A small number of producers, utilities, and trading houses are involved in the spot purchase and sale of LNG cargoes into Europe. An illiquid market makes it more challenging to establish a price that is acceptable to market participants.