Surprise: Global gas price convergence has been happening since 2005 By Floris Merison
In the period 2005-2015, global natural gas
for gas market integration are shown in Figures
markets have expanded and become more
1 and 2, taken from the IGU World LNG Report,
integrated through increased LNG trade,
2016 Edition, published by the IGU in April 2016.
increased market-related pricing and gas hub
Data from the IGU Strategy Committee show
development. From the basics of economic
that global gas volumes sold against market-
theory, it would be expected that global gas
related (non-regulated) prices1 have increased
prices would converge. Research by the IGU
by more than 35% in the period 2005-2015
Strategy Committee in cooperation with energy
(Figure 3). The economic theory of the Law of One Price
business school the Energy Delta Institute (EDI) now shows that global gas prices have indeed
states that, in a perfect market, potential
converged during this period. This is contrary to
arbitrage opportunities between countries are
the conventional wisdom of global gas price
immediately exploited by market participants,
divergence, based on a few regional gas price
leading to convergence to one single price.
markers such as Henry Hub, NBP and Japanese
From this perspective, it would be expected
import prices.
that global gas prices should have converged, due to increasing arbitrage possibilities and
Market integration through growing LNG
further market integration.
markets, increased market-related pricing and hub development are clear developments in the x Figure 1.
global gas market during the last ten years.
xv Figure 2.
Some good examples of improved conditions
1400
30
1200
25
1000
20
800 15 600 10
400 200
5
0
0 1995
1999
2003
2007
2011
Non long-term cargoes traded Countries importing non long-term LNG (right axis) Countries exporting non long-term LNG (right axis)
2015
Percentage share
Increased number of exporting countries in the global LNG market (market shares) Number of countries
Number of cargoes
Increased non-long term LNG trade (contract duration less than five years)
1 Market-related pricing is largely gas-on-gas competition and oil price escalation, with an element of bilateral monopoly and netback pricing.
100%
80%
60%
40%
20%
0% 1990
1995
Qatar Trinidad Brunei Yemen
90 S u r p r i s e : G l o b a l g a s p r i c e c o n v e r g e n c e h a s b e e n h a p p e n i n g s i n c e 2 0 0 5
Australia Algeria UAE US
2000 Malaysia Russia Norway Angola
2005
2010
Nigeria Oman Eq. Guinea Egypt
2015
Indonesia PNG Peru Libya
