Why is Natural Gas Priced Differently Around the World?

Why is Natural Gas Priced Differently Around the World?

Natural gas prices fluctuate from year to year and can vary widely around the globe. Most consumers understand that, just like any other natural resource, natural gas is subject to the laws of supply and demand. But beyond this, there are regional factors that cause even more variation in natural gas prices around the world.

Factors Affecting Natural Gas Prices

Natural gas prices fluctuate by region for a huge variety of reasons, and supply and demand are only part of the picture.

In the U.S., most natural gas is extracted locally and transported via pipeline.

North American consumers of natural gas might be familiar with gas pricing as it relates to basic supply and demand laws.

But globally and regionally, there are an array of factors that can work together to cause great variation in natural gas prices, including:

  • Production levels
  • Production location
  • Gas storage levels
  • Natural hazards and weather
  • Global competition of energy resources/substitutes (Import/export)
  • Local competition of energy resources/substitutes
  • How far gas has to travel
  • Mechanism of transport
  • Government regulation and taxation
  • Global events like the COVID-19 pandemic

Changes in industrial demand for energy (e.g., Regions with high levels of building and econ growth)

In addition, prices are determined by economic factors such as:

  • Prices indexed to the cost of feed gas (cooled LNG)
  • The floating price in the destination market
  • Whether prices are indexed to oil or other commodities

How Transport, Supply, and Demand Influence Natural Gas Prices

Natural gas prices depend on how the gas is used, commodified, and incentivized. To some extent, prices can also drive supply and demand.

In deregulated markets like the U.S., natural gas prices are more vulnerable to trade markets.

According to the U.S. Energy Information Administration, natural gas prices boil down to two key factors in these types of markets:

  1. The commodity cost of the gas itself
  2. The distribution costs

If you have a lot of people in one area buying and selling gas, the prices will be more influenced by supply and demand.

In Canada, Europe, and some areas in Australia, hub gas pricing is the norm. This is the case where there’s plenty of infrastructure and a lot of storage opportunities, plus less government regulation.

In the US, it’s easy to extract, store and transport natural gas by pipeline because it is produced there. Where natural gas is not produced, it is typically delivered by cargo (ship or truck). When this is the case, the cargo is usually sold on a contractual basis.

In places where natural gas is not produced, those markets rely heavily on imports and exports, and therefore prices may be more heavily influenced by factors related to importing and exporting.

In addition, natural gas, which is shipped, is typically cooled first for shipping and storage. Liquid natural gas which has been cooled is much smaller in volume. The process of liquefaction, as well as other costs related to transport, can influence natural gas prices.

Extra costs related to importing and exporting natural gas, such as liquefaction costs, storage and loading fees, may also be at play for both importers and exporters.

World Gas Markets: 4 Categories

Natural gas prices are influenced based on regional factors. The Independent Natural Gas Information Site (Natgas.info) breaks down global markets into 4 categories:

  1. Gas-on-gas markets – liberal, volatile (e.g., Canada, US)
  2. Gas prices are indexed to substitute energy types (e.g., Central Eu, South Asia)
  3. Oil-linked price markets – mostly imported (e.g., Japan, Korea)
  4. Regulated markets – government regulates heavily (e.g., Middle East, Russia)

Group 1 – Gas-on-gas markets

  • Natural gas prices typically follow regional supply and demand.
  • There is very little in the way of government intervention, and trade is open and transparent.
  • In these countries, there is already plenty of infrastructures set up, and there is little in the way of extra usage or transport costs.
  • In a free market like this, pricing must stay transparent in part because different parties can own different elements of the chain.
  • Pricing remains competitive and transparent because no single supplier (or the government) can control it.

Group 2 – Gas prices are indexed to substitute energy types

  • Central EU, Southern EU, South Africa, and some parts of Southeast Asia, there is a limited but growing gas grid and some storage facilities.
  • Here, natural gas prices tend to be indexed to substitute energy products such as coal.
  • This trend will likely diminish as these regions move towards a greater acceptance and availability of alternative energy sources.
  • In the future, more U.S. LNG will be exported into the EU and Asia.

Group 3 – Oil-linked price markets

  • Group three consists mostly of traditional LNG markets.
  • North Asia is a key player here, but other markets are emerging.
  • Most regions in North Asia have limited domestic energy resources and limited infrastructure, so they must rely exclusively on imported LNG.

Group 4 – Regulated markets

  • In this group, natural gas prices are mostly controlled by the state and may be artificially low at times.
  • There is very little transparency and no active markets.
  • Large government subsidies also tend to distort the real cost of gas and cause wastage.

Natural Gas Prices: What Happens Next?

There’s no way to predict what will happen to natural gas prices in the future. But having a grasp on how various markets operate can give buyers a glimpse into overarching trends and why prices can vary by region.

Some trends which seem to be growing include volatility, convergence between markets, growth of pricing hubs, and a delinking of gas with oil/oil products.

Volatility will continue as new markets and new energy formats become more popular. It is hard to tell how this will influence natural gas prices, but there will likely be a greater supply-and-demand influence everywhere.

RP Gas Piping can help you to understand where your hard-earned dollars are going and where you can save money on gas bills.

Contact us to learn more about the benefits of natural gas in your home or business.

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