《Hayes_Seasonal_LNG_trade》.pdf

Hayes, Chapter 2 6 August 2006 A Stylized Model of Seasonal Price Formation in Integrated Regional Gas Markets by Mark H. Hayes1 I. Introduction Gas markets were, until recently, regionally isolated. North American gas markets have been largely independent, even in 2005 the U.S. imported just 4% of its gas supply from outside the continent. European gas markets depend on long-distance pipeline imports from Russia, North Africa and the North Sea with LNG imports making up 9% of total gas supply in 2004 (BP 2005). However, LNG trade is projected to grow rapidly over the next two decades. The U.S. EIA estimates that LNG will provide 21% of U.S. gas demand by 2025 (EIA 2005a) and imports by OECD Europe are also projected to increase to 28% of total gas supply over the same period (Hirschhausen 2006). Simultaneous to the growth in LNG trade, contracting structures for LNG deliveries are also evolving. The expansion of total LNG shipments will make flexible trade more feasible and economically attractive. And an increasingly competitive and robust market for LNG cargoes will mean that cargo destinations and prices will be increasingly determined by the opportunity cost of supply and demand in the offtake markets. This shift will not happen overnight, and indeed the bulk of LNG cargoes traded today maintain oil-price linkages rather than competitive, market-based pricing. However, over time, we may expect that LNG suppliers will seek to maximize their returns, and deliver cargoes to buyers willing to pay the highest price. Such a structure does not necessarily preclude long-term contracts. A buyer with a long-term delivery commitment might agree to the diversion of specific cargoes, so long as he was offered some of 1 This is a draft text. Not