Session 7 Gas and LNG PRICING Principles.pptx

the scope of this presentation to cover:
1. Gas and LNG Pricing
2. Indexation of Long term LNG
3. Price determination and adjustment
4.Oil-linked Price
5. Gas Linked Price
6. Energy Product Linked Price
7. Base load and adjustment mechanism
8. Feedstock gas linked to end product price
9.Spot market pricing

1. Gas and LNG PRICING Sampe L. Purba

2. Gas and LNG Pricing Concern over long-term contract. For short term not much concern as it can bench mark to available index in market Basic consideration from seller’s perspective Infrastructure Costs Operating Costs Expected returns Sep-24 2 Sampe Purba - GAS and LNG PRICING

3. Indexation of Long Term LNG North Asia : Japanese Customs Cleared [JCC]  as gas coming from outside of the countries Europe : Indexing to local competing price such as NBP, crude price, Product etc The United States :Referring to net-back pipelines Henry Hub Cost of transportation and regasification will be reflected Sep-24 3 Sampe Purba - GAS and LNG PRICING

4. Comparison of Gas/ LNG Price Indices: HH, NBP and JCC Sep-24 Sampe Purba - GAS and LNG PRICING 4 @Chatbot AI generated source

5. Price Determination and Adjustment Very complex pricing mechanism Could be linked to oil prices, natural gas indices or other benchmarks like electricity prices, coal prices etc Some contract using base line, S-Curve etc Sep-24 5 Sampe Purba - GAS and LNG PRICING

6. Oil-linked Price JCC uses this link, as a historical legacy where in the past natural gas was assumed as by product of oil Production. Indonesia is one of the pioneer to this formula LNG Price=α×Crude Oil Price+β Where: α is the slope, usually ranging between 10-15% (reflecting the energy equivalence between LNG and oil). β is a fixed component that adjusts for transportation, liquefaction costs, or market-specific factors. Sep-24 Sampe Purba - GAS and LNG PRICING 6

7. S-Curve LNG Pricing Mechanism Sep-24 Sampe Purba - GAS and LNG PRICING 7

8. Another illustrative S-Curve Sep-24 Sampe Purba - GAS and LNG PRICING 8 Low Slope (Steeper) : Below $40/ bbl , the LNG price increases sharply to protect sellers. Mid Slope (Standard) : Between $40 and $100/ bbl , the price follows a moderate, typical slope. High Slope (Flatter) : Above $100/ bbl , the slope is much flatter, capping the price to shield buyers from high costs.

9. Gas Linked Price In markets like the United States and Europe, LNG prices are often indexed to natural gas benchmarks such as Henry Hub (US) or NBP (UK). Formula : The price might be directly linked to the gas index. LNG Price = Gas Index Price + Fixed Premium This formula allows for a more direct connection to the prevailing gas market prices, which can be more volatile but reflective of real-time supply and demand conditions. Sep-24 Sampe Purba - GAS and LNG PRICING 9

10. Energy Product Linked Price Some contracts link LNG prices to the price of petroleum products, such as naphtha or fuel oil, particularly in Asia where LNG competes directly with these fuels in power generation. Example : The LNG price might be indexed to a basket of fuel oil and naphtha prices, ensuring competitiveness with alternative fuels. Formula Structure A common formula linking LNG prices to fuel oil and naphtha might look like this: LNG Price= α× Fuel Oil Price+ β× Naphtha Price+ γ Sep-24 Sampe Purba - GAS and LNG PRICING 10

11. Baseload and adjustment mechanism Base Load Pricing : Set a baseline price for a fixed quantity of LNG (base load), with additional volumes priced at a different rate. This can ensure steady revenue for the seller while allowing for flexible pricing on incremental volumes. Adjustment Clauses : Contracts may include clauses that allow for periodic adjustments based on various factors: Market conditions : Adjustments based on shifts in global LNG demand/supply. Regulatory changes : Price adjustments tied to changes in taxes, tariffs, or other regulatory frameworks. Currency fluctuations : Adjustments due to exchange rate movements between the buyer’s and seller’s currencies. Sep-24 Sampe Purba - GAS and LNG PRICING 11

12. Feedstock Gas Linked to End Product Price Natural Gas Price= α×Ammonia Price+β×Petrochemical Product  Price+γ×Fertilizer   Price+δ Where: α , β , γ are the weighting factors for ammonia, petrochemical products, and fertilizers, respectively. δ is a fixed adjustment or base price, which could account for transportation costs, production costs, or other factors. Sep-24 Sampe Purba - GAS and LNG PRICING 12

13. Spot market Pricing Spot Price driven by: short-term supply and demand dynamics Seasonal factors Immediate market conditions International Gas Union IGU In 2023 Global LNG traded 52.9 Bcf/d Long term LNG Contracts [>4 yrs] 61.1% Medium [4 mths-48 mth ] 3.7% Short term up to 3 mth after signing 35.7% Sep-24 Sampe Purba - GAS and LNG PRICING 13

14. Most commonly used LNG spot market indices JKM [Japan Korea Marker] – Northern Asia TTF [Title Transfer Facility] – Europe NBP [National Balancing Point] – UK HH [Henry Hub] – US ANEA [Argus Northeast Asia LNG] – Northern Asia WIM [West India Market] – South Asia GCM [Gulf Coast Master] – US Gulf Coast Sep-24 Sampe Purba - GAS and LNG PRICING 14

15. References Peter Roberts https://www.amazon.com/Gas-LNG-Sales-Transportation-Agreements/dp/041411129X Chatbot. AI generated sources https://globalenergyprize.org/en/2024/07/12/long-term-contracts-providing-over-60-of-global-lng-trade/ Sampe Purba – https://www.slideshare.net/sampepurba Sep-24 15 Sampe Purba - GAS and LNG PRICING

16. Sep-24 16 Sampe Purba - GAS and LNG PRICING