The Structure and Dynamics of Liquefied Natural Gas Pricing in Asia and the Pacific and

Abstract

The Asia-Pacific gas market is the biggest and fastest growing LNG market in the world. In the past is has been dominated by the JCC oil linked pricing mechanism. However, given the recent challenges facing this mechanism, especially since 2008, there is a growing concern that the JCC pricing mechanism no longer reflects prevailing market conditions. This paper provides a modelling approach for analysing the structure and dynamics of LNG pricing in the Asia and the Pacific region over the past decades. Econometric estimations for the period of 1989-2014 indicate that the JCC linked mechanism remains important, but its contribution to LNG pricing is becoming less significant. The role of the base price and non-oil linked factors in LNG price formation are instead becoming more important.

Applying the econometric results, future LNG prices in the Asia-Pacific are projected for the period of 2015 - 40 based on three different scenarios for long term crude oil prices. Over the short term, the LNG price is expected to ease due to decreasing crude oil prices and increasing LNG supply. Over long term, LNG prices are expected to increase due to increasing crude oil prices and LNG demand.

Given substantial gas resources, and its advantageous location, Australia's LNG market has been expanding significantly, with Australian to soon be potentially the largest LNG exporter in the world. Trade liberalisation implies that eastern Australia is most likely to be affected by LNG pricing in the Asia and Pacific region. This paper provides a projection scenario for Australia's netback prices, which is essential for eastern Australia's future gas development and LNG export revenues. Export revenue from eastern Australia is projected to increase from about A$8 billion in 2015 to A$24 billion in 2030.