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LNG PRICING: IMPACT OF GLOBALIZATION AND HIGH PRICES ON LONG TERM CONTRACT NEGOTIATIONS
Ronan Huitric VP LNG Marketing Total Paris, France

ABSTRACT Recent spot transactions have demonstrated a link between Atlantic bound related transactions and Asian requests for additional cargos on top of long term commitments traditionally priced on crude oil : - Will this trend towards globalization in short term transactions translate into a similar 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 it be? - What would be the main drivers behind such trend and which actors would initiate it? - If so what about the impact on the gas-oil linkage: will it be definitely forgotten or rather 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 the options available to LNG marketers. However, the LNG industry structure and the players expectations tend to counter this 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 dynamics for a foreseeable future. Hence, the pricing issue, although not the only one, should remain a major hurdle to overcome 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 a paper dedicated to LNG. Most often, the LNG is described as the solution to some major problems 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 not connected to gas pipelines and more importantly assume the swing role both from a demand and supply point of view. True, LNG is liquid! But does this physical characteristic necessarily translate into a business model that would eventually liken LNG trading to oil trading? Industry experts and observers would recall the transformation of the crude oil trading in the mid 70s with the rapid disappearance of the long term contracts in favor of spot arrangements: it took 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 and neither 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: oil companies (NOCs and IOCs alike) rely on the market forces and spot price benchmarks for such major decisions. Is this transformation possible for LNG (if not directly for piped gas)? Both the existence of a strong gas-oil price relationship and the most recent trends with regard to spot transactions (and even short to medium term contracts) would support the theory that LNG 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 and long term transactions worldwide. Our position however is that some key features of the LNG industry and players need further review before drawing such conclusions. The postulate defended in this paper is that 2 different markets with separate dynamics will persist preventing the emergence of a single worldwide pricing model. This does not prevent convergence of prices in the long run but the persistence of different pricing mechanisms will generate regular and sometimes 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 in the Asia Pacific region to respond to critical needs for energy hungry Japan and later Korea. 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 teamed up to promote this new industry. Since the early 2000s, things started to change as domestic gas production in Europe and North America could no longer cope with ever increasing demand. Figure 1 illustrates the increasing share of the Atlantic market in the LNG 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 traditional gas 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 with the 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 most important changes but the fact that gas was already sold on both markets on the basis of spot 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 oil products or sometimes Brent formulae. Hence either LNG was willing to adapt to this pricing mechanism or there would be no room for it. What did the LNG sellers get in exchange? They got access to the most liquid gas markets, where demand was considered almost infinite provided price and only price could adjust. The question then became very similar to the one faced with oil project developers: what is the future gas price and does my project fly at this price?

LNG Pipeline gas

Bcm 900

LNG producing countries in 2015(e) Main markets

600

300

LNG

Pipeline gas Domestic production

2005

2010(e)

2015(e)

2005

2010(e)

2015(e)

2005

2010(e)

2015(e)

North America

Europe

Asia

source : Total estimates

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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, because there 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 the role 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 the emergence 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 the speed 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 then an 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 more focused 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, became less 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 the Atlantic markets. Middle East became the ideal swing supplier with LNG intended to go either East or West of Suez as illustrated on Figure 2. There are still of course initial technical restrictions mostly because of differences in gas specifications and capacity of existing LNG receiving terminals to accept larger vessels. But the recent developments have clearly demonstrated that there are always technical solutions to these initial constraints both at the sellers and the buyers ends. Therefore we will not spend much time on these aspects, assuming that they will be solved by the time the new projects come into operation.

Bcm, 2015

North America 120

30 5 85 80

Europe 130
50 90

Asia 220

Atlantic 165

Middle East 170

130

Asia 135

LNG imports

LNG production

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Figure 2. Emergence of swing producer in the Middle East With all major new projects targeting the Atlantic market and delays and difficulties experienced in the new Asia Pacific liquefaction projects, it became soon obvious that some redirection of volumes would materialize. Atlantic LNG market was projected to be oversupplied while Pacific projected demand was not covered by new projects. The critical element that rendered this mega swap conceivable was the ability of US and UK demand 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 for natural 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 we said above, potential producers will invest only if they can earn a reasonable return from their 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 liquefaction plant.
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$ / MMBtu
18

2001 - 2006

16

NBP

14

12

Henry Hub
10

Japan average LNG landed price

2

0 janv-01

juil-01

janv-02

juil-02

janv-03

juil-03

janv-04

juil-04

janv-05

juil-05

janv-06

juil-06

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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 intensive projects like LNG projects, one must also develop a view on the long term supply demand picture that could potentially sustain high prices in the future. Most often than not, 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 5 years projected prices that would make most of the LNG projects viable: most of the forecasts 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 above Atlantic benchmarks reversed in the early 2000s. Buyers and sellers might agree on such forecasts but what made these projects turn real was the fact that the banks also accepted these premises and were willing to lend money 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, no single project developer or financier was willing to proceed without securing at least a volume off-take commitment: spot price mechanism is acceptable but long term contract shall not disappear at the same time! Evidence of short term arbitrage to balance the Pacific markets Although most of the volumes destined to the Atlantic markets are linked to projects still in the development phase, there has been already some clear evidence that the arbitrage could work on a short term basis. Faced with reduced production from their long term suppliers and a higher than expected demand due to unusually cold weather and nuclear power plant disruptions, the main players in the Asia Pacific were forced to look for all available cargos during the 2005-2006 winter period. On a cargo by cargo basis, in order to secure additional volumes, the Asian utilities had 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 term contract 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 compete among 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

28 26 24 22 20 18 $/MMbtu 16 14 12 10 8 6 4 2 0 janv-05 juil-05 janv-06 juil-06

NBP

HH

Japan Landed price

Spot Japan

Spot Korea

Spot US

Petronet

Spot India

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Figure 4. What benchmark for Asian spot prices? Another very interesting feature of the recent period was the Indian market development: 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 was flowing into India and the customers had to turn to oil products (mainly naphta) as substitutes 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 persuasion efforts for all parties (sellers, buyers but also in that case regulatory authorities) to agree on paying the international market price for LNG. Since then, a significant number of cargos 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 theory could 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 LNG PRICE BENCHMARK Economic theory suggests that prices of natural gas and oil should be linked both from 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 some cases). This theoretical link has been observed on statistical series and was recently the subject of numerous research works. It is beyond the scope of this paper to discuss the validity of these works but this link should in theory have direct implications on the emergence 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 ?

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Figure 5 . Pricing zones Asia Pacific market: the oil indexed formula paradigm The salient characteristic of LNG contract prices in Asia LNG trading is what is perceived as the indestructible link between LNG price and crude oil price. Historically introduced in Japan as a replacement for crude oil in direct burning, LNG was priced against this substitute. Crude oil parity was therefore the rule in the early days only marginally distorted to take into account fixed elements of the cost chain. This link was later 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 crude prices (as those experienced in the years before its introduction). The long term relationship, 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 plant efficiencies and in some cases slowdown of economic growth, buyers had a stronger hand in 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 finally managed 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 deals with prices independent from crude oil prices as soon as the later was above $/b 25! The main 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 coal for power generation and not with oil, as argued by sellers. Project developers, eager to launch 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 of time! Instead of introducing coal indices in the formula, gas prices were capped at a then supposed to be competitive market price.

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Such buyers advantage did not last for so long and when oil prices started to rise again, 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 become very tight, even before the Chinese terminals started their operation. It must also be added that this S-curve mechanism contributed itself to such disequilibrium: in times of high oil prices, LNG becomes relatively cheap and demand therefore is stimulated while producers are no longer willing to develop new projects to produce LNG but instead favor oil projects. What had changed was not necessarily that LNG would not have to compete with coal or nuclear but that it was no longer possible to develop coal power plants in China or nuclear 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 environmental reasons, helped in this instance by some carbon tax penalties imposed on other fossil fuels. Hence China now probably wants less LNG than in the previous plans but accepts the 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 Japan and 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.

Mid 06

LNG price (ex ship) in $/MMBtu

e d ru C ty ri a p

Japan
Late 05 Mid 06 Mid 05

China
Early 06 2003

Crude price in $/b

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Figure 6 . Asia Pacific : evidence of a sellers market The above history is clearly illustrated on the Figure 6 both for Japan and China. One can easily identify on these curves that, because of the various specificities described above, there remains significant differences in prices between Japan and China. Atlantic 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 oil and gas prices in the Atlantic basin is a more complex phenomenon. On the basis of the economic 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 within what 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 3 years) this obvious link is no longer so obvious. In such situations, one has to introduce additional 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.

$/ M M B t u
1 6 ,0

$ /M M B t u
1 6 , 0

W T Iv sH e n r yH u b :1 9 9 0-2 0 0 6
1 4 ,0

B r e n tv s N B P :1 9 9 4 -2 0 0 6
1 4 , 0 1 2 , 0

1 2 ,0

1 0 ,0

1 0 , 0

8 ,0

8 , 0

W T I
6 ,0

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0 ,0 ja n v -9 0j a n v -9 1ja n v -9 2ja n v -9 3 ja n v -9 4ja n v 9 5ja n v 9 6ja n v 9 7ja n v -9 8 ja n v -9 9ja n v -0 0ja n v -0 1 ja n v -0 2ja n v 0 3ja n v 0 4 ja n v -0 5ja n v -0 6

N B P

0 , 0 j a n v 9 4 j a n v 9 5 j a n v 9 6 j a n v 9 7 j a n v 9 8 j a n v 9 9 j a n v 0 0 j a n v 0 1 j a n v 0 2 j a n v 0 3 j a n v 0 4 j a n v 0 5 j a n v 0 6

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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 long term. 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 international oil prices (as in the last 3 years), it can be argued that gas prices start to disconnect from oil prices. If the gas supply demand situation is not affected by extraordinary events (like the 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 react more dramatically than oil prices and be set by their own market fundamentals as shown on Figure 7. Over the long term however the supply-demand equation should impose a higher share 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 at the marginal level. This assumes of course that LNG is the marginal supply: this could be defended 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 supply considered to be more expensive than LNG. LNG would therefore remain a price taker and the contamination of Asia Pacific prices on the Henry Hub will, in our view, remain very 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 might therefore 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 for oil 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 States bound LNG, the NBP for United Kingdom volumes or Brent, WTI or Dubai for crude oil deals. Given the possible arbitrage on both sides of the Atlantic, one could argue that eventually Henry Hub / NBP differential should fluctuate in a narrow range and that an Atlantic Basin price benchmark should therefore emerge. This situation will become even more evident when the regas projects on both sides of the Atlantic materialize and create the necessary overcapacities for such arbitrages to take place. How about the Asia Pacific region? Such a single benchmark could greatly facilitate long term price negotiations in the Asia Pacific and could allow buyers and sellers alike to hedge their positions on the most liquid gas markets. This would solve the difficult question 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 exist enough 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 most Atlantic LNG buyers as long as they have the option to hedge their positions and acquire or 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 States and 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 so obvious: they do have some regulatory constraints to physically supply gas to their customers in all circumstances and they are on the other hand dependant on the regulatory authorities for price control. Hence they can not afford to either capture the most lucrative market 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 conditions to balance their demand. France and more noticeably Spain have experienced such restrictions during the recent years which translated in the case of Spain into additional regulatory requirements in terms of storage obligations. It is even more obvious that when such price setting option is proposed to traditional Asia 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 the irrepressible feeling that their gas prices would be set by external factors disconnected from 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 to such spot benchmarks. Buyers therefore would not (or could not) necessarily be in favor of one pricing system. Sellers preference and emergence of portfolio approach On the seller side, a symmetrical argument can be sustained: for those sellers who have launched projects on the basis of contracts in the Atlantic basin (Henry Hub or NBP indexed), 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 of contracts that would work as a natural hedge against significant price drops in the Atlantic region. Knowing that there is a price at which pipe gas will replace LNG in the United States or United Kingdom, such seller would then offer additional volumes to LNG 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 to extract the best value on both markets in a sellers market. Hence there is a natural tendency to test the limits of the market: can a price formula be sustainable on a long term basis at levels above oil parity? Theory again suggests a negative response unless some particular conditions are attached to such prices which would transfer part of the economic 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 a more pragmatic approach and develop contracts that are generally sustainable, hence which reflect the basic economic theory. Hence another preliminary conclusion that existing sellers do not favor a single price mode either. Impact on long term contracting for Greenfield projects As mentioned at the beginning of this paper, no oil project today would be dependant on long term contracts. Players only rely on market prices and take risks based on their own 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 as well) are not prepared to assume the volume risk due to the very high capital intensive nature of the industry. Hence, they are bound to agree with potential buyers for a large share of the plant capacity before taking the Final Investment Decision. The key question is 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 should try 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 the same 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 higher prices, 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.

Atlantic customer
Suez LNG : 2.5 Mtpa (US) Total : 2.0 Mtpa (US)

Asia Pacific customer

KOGAS : 2.0 Mtpa (Korea)

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Figure 8. Yemen LNG: illustration of a Portfolio approach Selling both on the Atlantic and Asia Pacific markets clearly appears today to be the most secure option for new projects. Because of distances, it is more difficult (although not impossible as was demonstrated by either Tangguh or Sakhalin projects) to implement a portfolio approach for Asia Pacific ventures (Australian mainly) than for Middle East projects. Selling LNG on the Atlantic market today becomes a rather standard operation especially if one wants to target the liquid markets of United States or United Kingdom: prices will be based on netback formulae. The most difficult issue then is 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. Of course we do intend to give the winning solution to such problem. Price is not the only issue in a contract although it matters most! Figure 6 above clearly shows that there remain differences in expectations between Japanese and Chinese buyers for example. The differences in perception between buyers and sellers with regard to persistence or not of high price environment will tend to generalize in new contracts mechanisms that would introduce more reactivity than the traditional JCC indexed formulae. This could for 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 of too high or too low prices compared to the competition. The main difficulty with Price Review clauses is not the concept itself, but on which basis to set the trigger for the review. As always in negotiations, the devil is in the details and those who have tried to finalize Price Review clauses in Long Term SPAs (buyers and sellers alike) would certainly long remember the endless (and sometimes hopeless) discussions about who could benefit from such reviews. It does work in most of the early European LNG contracts 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 Review discussions even in Europe. In Asia-Pacific, this concept is slowly getting in the newly signed 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 for price forecasts and theory testing. In the real life, i.e. in the short term, there will always be 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 the Atlantic and in the Asia Pacific regions, there will always exist periods of transitional differences in regional LNG prices. The long term equilibrium will set the maximum and minimum 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 whose main business objectives are to fill the gaps, provided however that they are able to develop 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 same time 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 another clear indication that the game will remain very much a long term contract business with short term unbalances. In the very long term, all prices will eventually be aligned and this would mean the end of the long term contracts. It is our view that such situation will take time to emerge as long as there exist buyers who do not have alternative sources of supply (mainly in the Asia-Pacific) and green-field project developers who can not easily access liquid markets with swing demand (again mainly in the Asia-Pacific).

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