March 25, 2023

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The European Union wants a new benchmark for liquefied natural gas (LNG), based on transactions

The EU wants a new liquefied natural gas (LNG) benchmark based on transactions.

The reason: declining gas flows through Russian pipelines and record LNG imports have created imbalances in the current price-setting mechanism, reports Reuters.

The 27 EU member states are negotiating proposals made last week to control rising energy prices and reduce costs for consumers, but Brussels is already exploring the adoption of additional measures.

In a paper distributed to member states late on Wednesday and published on Thursday, the EU Commission said that an alternative LNG price index, which market participants can use voluntarily, should be based on verifiable assessments of prices for deliveries of LNG cargoes to ensure they reflect real world prices for the fuel.

“The complementary reference would limit the current negative effect on price formation due to infrastructure blockages [conductelor] and, therefore, it is anticipated to bring prices closer to the level of the world market”, the press release states.

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LNG buyers typically use benchmarks such as the Henry Hub for natural gas prices in the United States or the Japan Korea Marker (JKM) in Asia, with a small margin added to account for regasification and gas transfer costs in the network.

In Europe, the standard benchmarks are the Dutch Title Transfer Facility (TTF), used for both pipeline gas and LNG, and the UK’s National Balancing Point (NBP).

However, the FTT price has been affected by geopolitics and confidence as much as by supply and demand factors, and some industry sources argue that it can no longer define the real value of LNG in Europe, especially with the increase imports into the region this year.

LNG imports, at a record level

LNG imports to Europe have hit a record high this year as governments scramble to find alternatives to Russian gas, which, if phased out entirely, would require 200 million tonnes of LNG to be delivered over the next decade, analysts estimate.

While the price of LNG is generally higher than that of natural gas, infrastructure limits in pipeline networks and variable capacity to receive and process the chilled fuel have caused the relationship to change in some European hubs, causing major divergences of price.

Prices in France, for example, are lower than in other hubs such as Germany, which currently has no LNG terminals.

“It’s not a matter of days”

An EU official said that the Commission has already started work on a new reference contract with the Agency for the Cooperation of Energy Regulatory Authorities (ACER).

“It’s not a matter of days. Of course, it’s a process, but I think we can speed it up a bit,” the official said.

However, some market participants remain skeptical.

“TTF is still – by far – the most liquid gas market in Europe and, therefore, the most representative. If you filter LNG from TTF markets, liquidity will decrease, with huge risks of even higher volatility and therefore possible larger price swings,” said Hans van Cleef, senior energy economist at ABN Amro.

Anise Ganbold, senior analyst at Aurora Energy Research, said lowering the price of natural gas by removing or reforming the FTT could have unintended consequences, reducing incentives to increase gas supply or reduce consumption.

Meanwhile, Independent Commodity Intelligence Services (ICIS), which has been analyzing and pricing European gas markets for decades, said there were doubts about widespread acceptance of a new index.

“Only a few producers, utilities and trading houses actively buy and sell spot LNG commodities in Europe… It is much more difficult to establish an acceptable price for market participants in an illiquid market.

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