Is LNG market volatility a good thing?

With the Russian invasion of Ukraine, the LNG spot market has seen exceptional price volatility.?Recent data published by the ACCC shows prices soaring from AUD 2.29/GJ in July 2020 to AUD 44.57/GJ in April 2022.

Traditionally, LNG has been sold under long-term contracts linked to the oil price.?This has enabled operators to sanction projects with a fair degree of assurance over often two or three decades of operation.?Given the enormous capital required to develop a greenfield LNG facility, operators are naturally cautious and conservative in their commercial approach.

But in recent years, more LNG capacity has been developed directly targeting the spot market. It is very difficult for producers to resist the temptation to access these exceptionally high prices.??But with such a volatile market, driven by factors well beyond operators’ control, how can operators have sufficient confidence to underpin these huge investments?

Recent events, such as COVID and the Russian invasion, should be teaching us important lessons.?One lesson is that there are very many factors over which individuals and companies have no control.?Another lesson is that market conditions can change very quickly, and it is important that the financial structure of your business has a strong foundation, and capacity to accommodate significant market volatility.

Time will tell whether we have all learnt these lessons.???But what goes up must come down, and without a disciplined fiscal regime, LNG operators may find themselves highly distressed and vulnerable.

?Jeanette Roberts is an energy industry leader and Non-Executive Director.??She is interested in global energy issues, and their impact on the Asia Pacific region.

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