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LNG PRICING: IMPACT OF GLOBALIZATION AND HIGH PRICESON LONG TERM CONTRACT NEGOTIATIONS

Ronan HuitricVP LNG Marketing

TotalParis, France

ABSTRACT

Recent spot transactions have demonstrated a link between Atlantic bound relatedtransactions and Asian requests for additional cargos on top of long term commitmentstraditionally priced on crude oil :

- Will this trend towards globalization in short term transactions translate into asimilar phenomenon in long term contracts?

- What are the implications in terms of Price Review mechanisms?

- Are we moving towards a global LNG price benchmark and if yes, what would itbe?

- What would be the main drivers behind such trend and which actors would initiateit?

- If so what about the impact on the gas-oil linkage: will it be definitely forgotten orrather reinforced?

Economic theory would support such globalization of price structures based, among

other things on:

- Emergence of swing producers in the Middle East,

- Emergence of swing customers essentially in the Atlantic which have increased theoptions available to LNG marketers.

However, the LNG industry structure and the players expectations tend to counterthis evolution towards a single price mechanism. The idea developed in this paper is that

2 different LNG markets, in Atlantic and in Asia-Pacific, will keep their own dynamicsfor a foreseeable future.

Hence, the pricing issue, although not the only one, should remain a major hurdle toovercome by LNG project promoters to finalize long term contracts for green-field

projects even in a sellers market.


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INTRODUCTION

It is impossible today to open an oil and gas industry magazine without at least apaper dedicated to LNG. Most often, the LNG is described as the solution to some majorproblems facing the gas industry resulting from the rigidities inherent to the gas chain.

LNG can at the same time bring far away gas reserves to new emerging markets notconnected to gas pipelines and more importantly assume the swing role both from ademand and supply point of view.

True, LNG is liquid! But does this physical characteristic necessarily translate into abusiness model that would eventually liken LNG trading to oil trading? Industry expertsand observers would recall the transformation of the crude oil trading in the mid 70swith the rapid disappearance of the long term contracts in favor of spot arrangements: ittook only a few years to revolution the world of oil trading. No one today worries about

long term contracts before launching huge investments in oil producing facilities andneither do sellers and buyers of oil spend sleepless nights arguing about a few cents or the

exact shape of the S-curve that would set the contract price for the next 20 years: oilcompanies (NOCs and IOCs alike) rely on the market forces and spot price benchmarksfor such major decisions.

Is this transformation possible for LNG (if not directly for piped gas)? Both theexistence of a strong gas-oil price relationship and the most recent trends with regard tospot transactions (and even short to medium term contracts) would support the theory thatLNG would soon be traded like oil and that is just a matter of time (some years maybe?)

before there exists only one single reference price for LNG applicable to both short andlong term transactions worldwide.

Our position however is that some key features of the LNG industry and players needfurther review before drawing such conclusions. The postulate defended in this paper isthat 2 different markets with separate dynamics will persist preventing the emergence of asingle worldwide pricing model. This does not prevent convergence of prices in the long

run but the persistence of different pricing mechanisms will generate regular andsometimes significant unbalances between markets.

-1- THE GENESIS OF THE QUESTION

Emergence of a swing market in the Atlantic

Historically, although born in the US and Europe, LNG has been developed mainly inthe Asia Pacific region to respond to critical needs for energy hungry Japan and laterKorea. Pipe gas was not considered a viable option (except for some very small volumes)and both buyers and sellers in the Asia Pacific region and later in the Middle East teamedup to promote this new industry. Since the early 2000s, things started to change asdomestic gas production in Europe and North America could no longer cope with everincreasing demand. Figure 1 illustrates the increasing share of the Atlantic market in theLNG demand.

The emergence of LNG import into continental Europe (mainly France first and then

Spain) did not create a significant change in the industry : buyers were still the traditionalgas utilities and pricing were, similarly to existing long term pipe gas contracts, linked to


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oil prices through a long term formula. Things really started to change significantly withthe emergence of the United States and then the United Kingdom as key demand centers

for future LNG. It was not the size of these markets in itself that provoked the mostimportant changes but the fact that gas was already sold on both markets on the basis ofspot gas prices: Henry Hub on one side of the Atlantic and NBP on the other therefore

made their entry into the LNG industry up to then comfortably installed into the oilproducts or sometimes Brent formulae. Hence either LNG was willing to adapt to thispricing mechanism or there would be no room for it. What did the LNG sellers get inexchange? They got access to the most liquid gas markets, where demand was consideredalmost infinite provided price and only price could adjust. The question then became verysimilar to the one faced with oil project developers: what is the future gas price and doesmy project fly at this price?

LNG 15 PS1-4 Ronan Huitric

source : Total estimates

Bcm

900

300

LNG

Pipeline gas

LNG producingcountr ies in 2015(e)

Main markets

Pipeline gas

Domestic production

North America Europe Asia2005 2010(e) 2015(e)2005 2010(e) 2015(e) 2005 2010(e) 2015(e)

600

LNG

Figure 1. Emergence of swing market in the Atlantic

Another important feature that the LNG industry got in exchange for its willingness to

accept this additional price risk, and that initially was almost invisible, is that, becausethere is always (or almost always!) pipe gas available to replace LNG at a given price,LNG sellers and buyers could sign up for long term contracts and later on change their

mind if more profitable options emerge. These liquid markets could therefore play therole of a swing demand.

Emergence of a swing producer in the Middle East

Because of geography and available resources, the first producers to benefit from theemergence of this new demand boom were obviously West Africa and Caribbean

producers; hence the huge acceleration for example in the development of Nigeria LNG,after a historical slow start only supported by marginal demand in Continental Europe.But it became quickly obvious that the reserves and the capacity to develop projects at thespeed required by the projected demand were not sufficient in the Atlantic Basin. Some

of the major owners of gas reserves being located in the Middle East, this region was thenan obvious candidate to fill the gap and provide the necessary LNG required. Qatar was,


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if not the first, at least the major player to realize this potential (Russia was being morefocused on securing an always larger share of the European pipe gas market). Longer

distances, as compared to the traditional Asian customers of Middle East LNG, becameless of an issue with the introduction of bigger trains and larger LNG carriers.

Projects launched in the Middle East between 2000 and 2005 were all targeting theAtlantic markets. Middle East became the ideal swing supplier with LNG intended to goeither East or West of Suez as illustrated on Figure 2. There are still of course initialtechnical restrictions mostly because of differences in gas specifications and capacity ofexisting LNG receiving terminals to accept larger vessels. But the recent developmentshave clearly demonstrated that there are always technical solutions to these initialconstraints both at the sellers and the buyers ends. Therefore we will not spend muchtime on these aspects, assuming that they will be solved by the time the new projectscome into operation.


North

America

120

Europe

130

As ia

220

30

5090

LNG imports LNG production

Bcm, 2015

At lan tic

165

Middle East

170

As ia

135

130

5

5

85

80

Figure 2. Emergence of swing producer in the Middle East

With all major new projects targeting the Atlantic market and delays and difficultiesexperienced in the new Asia Pacific liquefaction projects, it became soon obvious thatsome redirection of volumes would materialize. Atlantic LNG market was projected to be

oversupplied while Pacific projected demand was not covered by new projects. Thecritical element that rendered this mega swap conceivable was the ability of US and UKdemand to play the swing role, as described above.

High gas prices in the Atlantic generates new projects

Volumes projected in these new markets for LNG (although very old markets fornatural gas), were significant, but it would not have generated such a frenzy of new

projects if price expectations of the project developers had not been high enough. As wesaid above, potential producers will invest only if they can earn a reasonable return fromtheir project. In the case in hand, this simply translates into a price forecast for either

Henry Hub or NBP (or both) that is high enough when netted back to the liquefactionplant.


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0

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janv-01 jui l-01 janv-02 jui l-02 janv-03 jui l-03 janv -04 jui l-04 janv-05 jui l-05 janv-06 jui l-06

Henry Hub

NBP

Japan average LNG landed price

2 0 0 1 - 2 0 0 6 $ / MMB t u

Figure 3. Historical gas prices per region

In a liberalized and competitive market, price signals are given by the short term but

also by the futures when they exist. In the case of long term and highly capital intensiveprojects like LNG projects, one must also develop a view on the long term supplydemand picture that could potentially sustain high prices in the future. Most often thannot, the energy industry tends to operate according to consensus views about the future.In the case of gas prices in the US, even the most pessimistic forecasts have for the past 5years projected prices that would make most of the LNG projects viable: most of theforecasts see Henry Hub not going below $/MMBtu 5 on a sustainable basis. As cab be

seen on Figure 3, the situation where traditional Japanese market price was always aboveAtlantic benchmarks reversed in the early 2000s.

Buyers and sellers might agree on such forecasts but what made these projects turnreal was the fact that the banks also accepted these premises and were willing to lendmoney to the projects assuming for the first time a price risk of such magnitude in an

LNG project. This was critical since, although the market was assumed to be there, nosingle project developer or financier was willing to proceed without securing at least avolume off-take commitment: spot price mechanism is acceptable but long term contract

shall not disappear at the same time!

Evidence of short term arbit rage to balance the Pacific markets

Although most of the volumes destined to the Atlantic markets are linked to projectsstill in the development phase, there has been already some clear evidence that thearbitrage could work on a short term basis. Faced with reduced production from theirlong term suppliers and a higher than expected demand due to unusually cold weather andnuclear power plant disruptions, the main players in the Asia Pacific were forced to lookfor all available cargos during the 2005-2006 winter period.

On a cargo by cargo basis, in order to secure additional volumes, the Asian utilitieshad to compete with the Atlantic market prices. As evidenced on the graph below, this

translated into prices delivered to Japan or Korea at levels much above the long termcontract prices. As shown on Figure 4, one can even argue that, due to the extreme


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tightness of the market during that period, the Asia Pacific buyers started to competeamong themselves and drove prices above the Atlantic equivalent (even including some

margin for the Atlantic buyer willing to release volumes).


Historical Prices over 2005-2007

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28

janv-05 juil -05 janv-06 juil -06

$/MMbtu

NBP HH Japan Landed price Spot Japan Spot Korea Spot US Petronet Spot India

Figure 4. What benchmark for Asian spot prices?

Another very interesting feature of the recent period was the Indian marketdevelopment: for long, the only price that a potential Indian customer would consider

paying for regasified LNG was the much publicized Rasgas-Petronet price (fixed price

until 2008, regardless of the crude oil price). Of course, at that price, no LNG wasflowing into India and the customers had to turn to oil products (mainly naphta) assubstitutes since domestic production was not sufficient to cover their increasing demand.It took some months after the start up of the Hazira terminal and considerable persuasionefforts for all parties (sellers, buyers but also in that case regulatory authorities) to agreeon paying the international market price for LNG. Since then, a significant number ofcargos have been traded into India at international market prices (most of them on a spot

basis). How were these cargos priced? They were clearly priced against the best

alternative for seller which often appeared to be Europe over that period but in theorycould well turn out to be United States in the future or even Asia in some instances.

-2- THE GAS-CRUDE OIL LINK SHOULD LEAD TO A WORLWIDE LNGPRICE BENCHMARK

Economic theory suggests that prices of natural gas and oil should be linked bothfrom a demand point of view (products are substitutes) and from a supply point of view(competition for capital and possibility to produce more oil with gas injection in somecases). This theoretical link has been observed on statistical series and was recently thesubject of numerous research works. It is beyond the scope of this paper to discuss thevalidity of these works but this link should in theory have direct implications on theemergence of a worldwide LNG price benchmark. Figure 5 illustrates the present

situation with the main regional price benchmarks.


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Brent/NBP/ZH

JCC

HH

HH ?

Brent/NBP/ZH

JCC

HH

HH ?

Brent/NBP/ZH

JCC

HH

HH ?

Figure 5 . Pricing zones

Asia Pacif ic market : the oil indexed formula paradigm

The salient characteristic of LNG contract prices in Asia LNG trading is what isperceived as the indestructible link between LNG price and crude oil price. Historicallyintroduced in Japan as a replacement for crude oil in direct burning, LNG was pricedagainst this substitute. Crude oil parity was therefore the rule in the early days onlymarginally distorted to take into account fixed elements of the cost chain. This link waslater altered by the introduction of the now famous S-curve to protect the buyers from

high LNG prices but also, we should not forget, to protect the sellers from very low crudeprices (as those experienced in the years before its introduction). The long termrelationship, key moto of the LNG industry in Asia, led to adjustments reflecting the

market power of either buyers or sellers but also the real economic value of the product.In fact, backed by a strong development of nuclear power, improvements in plantefficiencies and in some cases slowdown of economic growth, buyers had a stronger handin the negotiation while sellers were competing to launch new and always more complex

projects.

This situation culminated in the early 2000s when the Chinese customers finallymanaged to make a significant breakthrough on the LNG planet and secured prices for

their initial regas terminals at levels much below the traditional Asia-Pacific customers,even after application of the S-curve mechanism. Chinese customers concluded dealswith prices independent from crude oil prices as soon as the later was above $/b 25! Themain arguments in favor of such a curve was not unrelated to the competing fuel theory:Chinese customers argued that in order to launch the gas industry in China on a scale that

would justify importing LNG, sellers had to recognize that gas was competing with coalfor power generation and not with oil, as argued by sellers. Project developers, eager tolaunch new developments were easier to convince since, at that time, not many industry

players were willing to bet a lot on crude prices at such high levels for a long period oftime! Instead of introducing coal indices in the formula, gas prices were capped at a thensupposed to be competitive market price.


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Such buyers advantage did not last for so long and when oil prices started to riseagain, the pendulum soon started to swing back in favor of the sellers. Not enough

projects have been launched on the basis of such prices and the market started to becomevery tight, even before the Chinese terminals started their operation. It must also be addedthat this S-curve mechanism contributed itself to such disequilibrium: in times of high oil

prices, LNG becomes relatively cheap and demand therefore is stimulated whileproducers are no longer willing to develop new projects to produce LNG but insteadfavor oil projects.

What had changed was not necessarily that LNG would not have to compete with coalor nuclear but that it was no longer possible to develop coal power plants in China ornuclear power plants in Japan and Korea at a scale that would satisfy all energy needs.Additionally, LNG started again to be perceived as a fuel of choice for environmentalreasons, helped in this instance by some carbon tax penalties imposed on other fossilfuels. Hence China now probably wants less LNG than in the previous plans but acceptsthe fact that, in order to secure LNG for residential and industrial uses, it has to pay

higher prices on the international market. Likewise, historical customers (mainly Japanand Korea), having developed a serious addiction to LNG, can no longer leave without it

and are economically in a position to compete for the product on prices.


2003

Early 06

Mid 06

Mid 05

Late 05

Mid 06

Crude price in $/b

LNG price (ex ship)

in $/MMBtu

Chinahina

JapanapanCrude

parity

Figure 6 . Asia Pacific : evidence of a sellers market

The above history is clearly illustrated on the Figure 6 both for Japan and China. Onecan easily identify on these curves that, because of the various specificities described

above, there remains significant differences in prices between Japan and China.

At lantic gas-crude oil link less obvious in high price environment

Apart from the obvious cases where LNG prices are linked to oil product prices as in

traditional piped gas contracts mostly in continental Europe, the relationship between oiland gas prices in the Atlantic basin is a more complex phenomenon. On the basis of theeconomic theory, there should exist a structural link between the prices which, over the

long term should lead to equalization. Historical data tends to sustain such relationship


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even in the United States and United Kingdom during periods where prices are withinwhat could be called reasonable range. However when oil prices are depressed (as in the

mid 80s) or on the contrary when they are at historically high levels (as in the last 3years) this obvious link is no longer so obvious. In such situations, one has to introduceadditional and exogenous factors to be able to forecast with a reasonable degree of

confidence gas prices on the basis of oil prices as clearly evidenced on Figure 7.


0,0

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14,0

16,0

janv-90janv-91janv-92janv-93janv-94janv-95janv-96janv-97janv-98janv-99janv-00janv-01janv-02janv-03janv-04janv-05janv-06

WTI vs Henry Hub : 1990 -2006

$ / MMBtu

HenryHub

WTI

0,0

2,0

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WTI vs Henry Hub : 1990 -2006

$ / MMBtu

HenryHub

WTI

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

janv-94 janv-95 janv-96 janv-97 janv-98 janv-99 janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06

Brent vs NBP : 1994 -2006

$ / MMBtu

NBP

Brent

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janv-94 janv-95 janv-96 janv-97 janv-98 janv-99 janv-00 janv-01 janv-02 janv-03 janv-04 janv-05 janv-06

Brent vs NBP : 1994 -2006

$ / MMBtu

NBP

Brent

Figure 7. Historical comparison of Gas and Crude Oil benchmarks

As for the Asia Pacific case, during periods of low energy prices and abundant gas

supply, competition switch from oil to coal which sets a floor to gas prices in the longterm. Over short periods of time, the competition with coal could also become effective

on a marginal cost basis but then it sets a very low floor to gas prices (as in the mid 80s).On the contrary, when external geopolitical factors have a large influence on internationaloil prices (as in the last 3 years), it can be argued that gas prices start to disconnect fromoil prices. If the gas supply demand situation is not affected by extraordinary events (likethe major hurricanes in summer 2006) gas prices would then settle at levels lower than oil

parity. On the contrary obviously, if gas supply is interrupted, gas prices will tend to reactmore dramatically than oil prices and be set by their own market fundamentals as shownon Figure 7.

Over the long term however the supply-demand equation should impose a highershare of LNG in both the United States and Europe. The more traditional Asia Pacific oil

price indexed formula should therefore also impact gas prices in the Atlantic at least atthe marginal level. This assumes of course that LNG is the marginal supply: this could bedefended in the case of the United Kingdom but is more debatable in the case of the

United States where the supply-demand balance will necessitate additional supplyconsidered to be more expensive than LNG. LNG would therefore remain a price takerand the contamination of Asia Pacific prices on the Henry Hub will, in our view, remainvery limited for a foreseeable future.

Economic theory and arbitrage in favor of a single price benchmark

Regardless of whether or not the influence of regional prices is symmetrical, the

theory would suggest that a global price arbitrage should take place and one mighttherefore expect the LNG price in the Asia Pacific region to be set at levels equivalent to


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the Atlantic ones, give and take some quality and shipping adjustments (as is the case foroil prices most of the time). This would then lead to a worldwide LNG price which

could be used in contract negotiation just as easily as the Henry Hub is for United Statesbound LNG, the NBP for United Kingdom volumes or Brent, WTI or Dubai for crude oildeals.

Given the possible arbitrage on both sides of the Atlantic, one could argue thateventually Henry Hub / NBP differential should fluctuate in a narrow range and that anAtlantic Basin price benchmark should therefore emerge. This situation will become evenmore evident when the regas projects on both sides of the Atlantic materialize and createthe necessary overcapacities for such arbitrages to take place.

How about the Asia Pacific region? Such a single benchmark could greatly facilitatelong term price negotiations in the Asia Pacific and could allow buyers and sellers aliketo hedge their positions on the most liquid gas markets. This would solve the difficultquestion of establishing a gas price benchmark for Asia Pacific in the absence of an

obvious candidate to be recognized as a regional gas hub locally since there does not existenough liquidity in these markets.

-3- FROM THEORY to REALITY: WHAT DO MARKET PLAYERS WANT ?

Buyers are not all equal in the LNG game

Buying LNG on a Henry Hub or NBP forward looking formula is acceptable to mostAtlantic LNG buyers as long as they have the option to hedge their positions and acquireor resell the product at the same market related prices when physical delivery eventually

takes place. In fact, due to the unbundled nature of the industry, both in the United Statesand the United Kingdom, one can even argue that this is the only possible option for

buying LNG for these markets if one is to avoid endless cases about stranded costs.

In the case of the continental utility buyers, such pricing option is no longer soobvious: they do have some regulatory constraints to physically supply gas to theircustomers in all circumstances and they are on the other hand dependant on the regulatoryauthorities for price control. Hence they can not afford to either capture the most lucrativemarket at all times by redirecting their LNG cargos and conversely, they will not be in a

position to pass trough to their customers LNG acquired at unusually market conditionsto balance their demand. France and more noticeably Spain have experienced such

restrictions during the recent years which translated in the case of Spain into additionalregulatory requirements in terms of storage obligations.

It is even more obvious that when such price setting option is proposed to traditionalAsia Pacific buyers they are bound to refuse. Security of supply and predictability of

prices is the name of the game. Introducing sophisticated hedging proposals along with

new contract price formulae based for example on Henry Hub would not overtake theirrepressible feeling that their gas prices would be set by external factors disconnectedfrom their markets. The recent history of prices provide enough statistical evidence that

the more traditional JCC indexed formula is smoother than any related Henry Hub index,as shown on Figure 3, and therefore better suits the requirements of the Asia Pacific

buyers. Asia Pacific buyers even prefer to pay higher prices at times than what could be


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achieved based on Henry Hub in order not to be faced with the uncertainty inherent tosuch spot benchmarks.

Buyers therefore would not (or could not) necessarily be in favor of one pricingsystem.

Sellers preference and emergence of portfolio approach

On the seller side, a symmetrical argument can be sustained: for those sellers whohave launched projects on the basis of contracts in the Atlantic basin (Henry Hub or NBPindexed), why should they be willing to achieve the same economic return by selling to

Asia Pacific customers? On the contrary, they would rather develop a portfolio ofcontracts that would work as a natural hedge against significant price drops in theAtlantic region. Knowing that there is a price at which pipe gas will replace LNG in theUnited States or United Kingdom, such seller would then offer additional volumes toLNG hungry Asia Pacific buyers provided it can secure additional profit and guaranteed

revenues.

This strategy is clearly and openly pursued today by Qatar which is in a position toextract the best value on both markets in a sellers market. Hence there is a naturaltendency to test the limits of the market: can a price formula be sustainable on a longterm basis at levels above oil parity? Theory again suggests a negative response unlesssome particular conditions are attached to such prices which would transfer part of theeconomic benefit to the buyer. In a LNG industry which will most probably remain

dominated by long term relationship for a long time, buyers and sellers tend to adopt amore pragmatic approach and develop contracts that are generally sustainable, hencewhich reflect the basic economic theory.

Hence another preliminary conclusion that existing sellers do not favor a single pricemode either.

Impact on long term contracting for Greenfield pro jects

As mentioned at the beginning of this paper, no oil project today would be dependanton long term contracts. Players only rely on market prices and take risks based on theirown price expectations.

It is our strong belief that LNG will remain for a foreseeable future in a different

situation: project promoters (including sponsors but also in many instances financiers aswell) are not prepared to assume the volume risk due to the very high capital intensivenature of the industry. Hence, they are bound to agree with potential buyers for a largeshare of the plant capacity before taking the Final Investment Decision. The key questionis then where and to whom to sell? Based on what we explained above and the

permanence of 2 main regions governed by different pricing mechanisms, sellers shouldtry to secure optionality in their marketing strategy if they are in a position to do so.

Figure 8 illustrates the example of the Yemen LNG project which was eventually

launched in mid 2005 adopting the portfolio approach for marketing. It secured at thesame time an Asia-Pacific contract in Korea with a potentially lower but more robust

return in relation to oil price, but also managed to extract the benefit of potentially higherprices, leading to higher but also riskier netbacks, in the Atlantic market.


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Everett

6587 n.m.

L.Charles / Sabine

8234 n.m.

Incheon

5959 n.m.

KOGAS : 2.0 Mtpa (Korea)

As ia Pac if ic

customer

Suez LNG : 2.5 Mtpa (US)

Total : 2.0 Mtpa (US)

At lan tic

customer

Figure 8. Yemen LNG: illustration of a Portfolio approach

Selling both on the Atlantic and Asia Pacific markets clearly appears today to be themost secure option for new projects. Because of distances, it is more difficult (althoughnot impossible as was demonstrated by either Tangguh or Sakhalin projects) toimplement a portfolio approach for Asia Pacific ventures (Australian mainly) than forMiddle East projects. Selling LNG on the Atlantic market today becomes a ratherstandard operation especially if one wants to target the liquid markets of United States orUnited Kingdom: prices will be based on netback formulae. The most difficult issue thenis how and at what price to conclude long term contracts with potential Asia Pacific

buyers given that, by nature, they do not offer the same flexibility of redirection. Ofcourse we do intend to give the winning solution to such problem. Price is not the onlyissue in a contract although it matters most! Figure 6 above clearly shows that thereremain differences in expectations between Japanese and Chinese buyers for example.

The differences in perception between buyers and sellers with regard to persistence ornot of high price environment will tend to generalize in new contracts mechanisms thatwould introduce more reactivity than the traditional JCC indexed formulae. This couldfor example be achieved through appropriate price review clauses that would enable the

parties to better adhere to the market trends, hence not feeling spoiled either because oftoo high or too low prices compared to the competition. The main difficulty with PriceReview clauses is not the concept itself, but on which basis to set the trigger for thereview. As always in negotiations, the devil is in the details and those who have tried tofinalize Price Review clauses in Long Term SPAs (buyers and sellers alike) wouldcertainly long remember the endless (and sometimes hopeless) discussions about whocould benefit from such reviews. It does work in most of the early European LNGcontracts but it is often a simple copy-paste of the piped gas formulae. Recent discussions

have however shown that LNG might have to adopt different approaches to Price Reviewdiscussions even in Europe. In Asia-Pacific, this concept is slowly getting in the newlysigned contracts and experience is yet to be developed.


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CONCLUSION: DUAL PRICING SYSTEM STILL HOLDING FIRM

By definition, the long term never really occurs; but it is most useful as a basis forprice forecasts and theory testing. In the real life, i.e. in the short term, there will alwaysbe exceptional circumstances that prevent the theory from applying perfectly. Hence, and

because we postulate that there will remain at least 2 different pricing dynamics in theAtlantic and in the Asia Pacific regions, there will always exist periods of transitionaldifferences in regional LNG prices. The long term equilibrium will set the maximum andminimum prices depending on your perspective (buyer or seller) within which the actual

price will evolve.

This obviously generates opportunities for new players on the LNG markets whosemain business objectives are to fill the gaps, provided however that they are able todevelop portfolios of contracts that contain enough built in flexibility to allow regular and

unrestricted arbitrage. Such traders role in todays market is developed at the sametime by producers (NOCs and IOCs alike) as well as by traditional LNG buyers who

dispose of long term volumes beyond their market requirements. This is probably anotherclear indication that the game will remain very much a long term contract business withshort term unbalances. In the very long term, all prices will eventually be aligned and thiswould mean the end of the long term contracts. It is our view that such situation will taketime to emerge as long as there exist buyers who do not have alternative sources ofsupply (mainly in the Asia-Pacific) and green-field project developers who can not easilyaccess liquid markets with swing demand (again mainly in the Asia-Pacific).

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