Editor's note: This article is written for publication by a federal agency whose goal is to transparently coordinate permitting and construction of a pipeline that delivers Alaska's natural gas to the Lower 48.
In 2008, about the time tremors shook the global economy, natural gas prices around the world split like a frayed cable, with three strands pointed in different directions.
The upper strand was the price of liquefied natural gas in the prime markets of Japan and South Korea.
The lower strand was the price of pipeline natural gas in the United States, the world's largest gas market.
In between was the price of gas in Europe, where pipelines supply most of the gas, although Europe imports LNG as well.
For many years before 2008, the prices in the three markets basically tracked one another. Prices generally were within $1 per million Btu, whether the gas price was quoted in the U.S. Lower 48, Japan or Great Britain.
But at one point this fall, here was the spot price of natural gas around the world:
- $3.64 per million Btu in the Lower 48.
- $9.89 in Belgium.
- $10.90 in Spain.
- $14.44 in India.
- $16 in Japan and South Korea.
"This year, prices for natural gas have diverged sharply in the main consuming markets, reaching a disparity rarely seen in any commodity market," Richard Swann, a Platts editor, said in early October.
The recession that started in 2008 explains part of how natural gas prices diverged in different areas of the world. The rise of shale gas production in the United States also helps explain why Japanese buyers pay up to four times more for natural gas today than North Americans.
But those factors really just made visible another factor that wasn't readily apparent before: Each market -- Asia Pacific, Europe and North America -- had separate internal dynamics that dictated their natural gas prices.
Their gas markets have different histories, sources of supply and reliance on imports. As a result, the global economic meltdown, high oil prices and rise of shale gas played differently in each market.
Many in the natural gas industry hope that someday a global natural gas market can develop, similar to the one for crude oil, where price differences are explained more by the quality of the oil than where it is sold.
But that day seems far away, although few think the current price disparity will be permanent. If for no other reason, the forces of arbitrage eventually will take hold if the price gaps persist, where traders buy gas in the lower-priced market and sell it in higher-priced markets until the prices everywhere start to converge. (The gas industry lacks the traders, storage, pipeline and liquefaction infrastructure, price indexes and other market features needed to broadly engage in arbitrage globally today.)
For now, natural gas is in a pricing world that energy consultant Simon Bonini, a former gas executive with Britain's largest utility, recently called "very, very, very confusing."
Prices, not price
When looked at over time -- say the past few decades -- the price of natural gas around the world tells a consistent story: Prices in North America, Europe and Japan were remarkably similar.
Not identical. Not perfectly correlated. But similar.
For example, from 1989 through 2007, the average difference between the natural gas import price in Germany and the Henry Hub spot price in the United States was 3 cents per million Btu -- the German price averaged $3.53 per million Btu and the U.S. price averaged $3.56 during those 19 years, according to the BP Statistical Review of World Energy.
From 1996-2007, the average price of LNG in Japan was $4.86 per million Btu, compared with an average of $4.60 for U.S. Henry Hub pipeline gas, a 26-cent difference. In three of those 12 years the average U.S. spot price was actually higher than the Japan LNG price – in 2005 the U.S. price averaged $2.74 per million Btu higher than the LNG price.
Another point worth making is that there isn't a single price for gas in any of the different regions of the world.
The Oct. 17 issue of trade journal Natural Gas Week shows 82 different pricing points in the U.S. and Canada -- typically where pipelines intersect -- including the well-known Henry Hub in Erath, La. The price ranged from $2.54 per million Btu at one British Columbia location to $4.07 in Dracut, Mass., north of Boston. Pipeline shipping costs as well as regional supply-and-demand factors account for the differences.
European nations import pipeline gas from Russia, Norway, Algeria and elsewhere, and the continent has LNG receiving terminals in the United Kingdom, the Netherlands, Belgium, France, Spain, Portugal, Italy and Greece. Each terminal has its own gas price. A handful of these prices commonly get cited as a proxy for the European price, kind of the way the Henry Hub is a proxy for U.S. spot prices: the National Balancing Point, or NBP, in the UK; a similar trading point called the Title Transfer Facility, or TTF, in the Netherlands; and the Zeebrugge LNG port in Belgium. Natural Gas Week reported the September-October spot-price averages as $8.37 per million Btu at the NBP, $9.17 at TTF, and $9.31 at Zeebrugge, a 94-cent range.
The gas price in Asia also isn't a monolith. Japan utilities typically price their LNG buys based on a blend of crude oil prices paid in the country. Indonesia prices are based on a separate blend of oil prices. A rule of thumb is that Taiwan pays $2 over the European price. China wants to pay as little as possible – and with so many gas suppliers wanting China as a customer, the country has had some success in negotiating lower prices.
The three big gas markets -- Asia, Europe and North America -- developed different models for how to price natural gas based on their unique circumstances.
For many years, the prices they paid for gas were remarkably similar.
But now the differences in their pricing models are sending different signals about what the proper natural gas price should be.
Bill White is a researcher/writer for the Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects, an office established by the U.S. Congress in 2004 "to expedite and coordinate federal permitting and construction of a pipeline to deliver natural gas from the Arctic to North American markets, and to enhance transparency and predictability of the federal regulatory system for the project." This commentary first appeared on the Federal Coordinator's website.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com