BHP favours spot market pricing for LNG, predicts end to oil-linked model

BHP Billiton is predicting the end of the historically lucrative oil-linked LNG pricing model, predicting a move to spot market pricing.

BHP Billiton is predicting the end of the historically lucrative oil-linked LNG pricing model, but believes it will be replaced by a system based on pure “fundamentals” rather than the shale-linked model feared by producers.

BHP executive Mike Henry said at a conference of business leaders from Australia and Japan — our biggest LNG market — that long-term contracts would give way to a price more closely tied to spot market indices.

“BHP believes that LNG will behave like any other commodity and that is that it will be priced on its merits — and that will happen over time,’’ Mr Henry said.

His stance was backed in part by the managing executive officer of Japanese trading house Marubeni, Shinji Kawai, who said Australia’s LNG pipeline was frozen because utilities in Tokyo and Osaka were not willing to sign on to long-term contracts in the current climate of uncertainty over pricing models.

It is understood that BHP, which has a preference for selling products at index-linked prices based on supply and demand as opposed to long-term contracts, believes there is little logic in tying LNG sales in Asia to the oil index or the US domestic Henry Hub price.

This would likely mean contracts of far shorter duration than the current 20-year oil-linked ones with the price paid fluctuating with the value of a credible spot index of LNG trades.

Mr Henry, the miner’s marketing president, told the Australia Japan Business Co-operation Committee meeting in Darwin that “legacy purchasing practices concentrate risk among fewer parties and in some instances further increase risk if contracts are structured in a way that ignores economic reality”.

“LNG is a commodity where market liquidity and pricing transparency lags other commodities. Support for greater spot market depth and pricing on the basis of LNG fundamentals, rather than by reference to other indices, will enhance the functioning of the LNG market and supply resilience.

“Recent tentative moves by both buyers and sellers in this direction are encouraging but should be accelerated.”

BHP was an early investor in the North West Shelf LNG project and has several shale-gas projects in the US.

Santos vice-president of LNG markets Peter Cleary told the conference 70 per cent of LNG would continue to be traded on long-term contracts, although there was an “appetite in Asia to build a more robust spot market”. This transition in iron ore pricing took over a decade,’’ he pointed out.

Woodside chief Peter Coleman said a move to a more liquid LNG trading model would “happen over time”.

“We see a transition over the 5 to 10 years,’’ he said. “It’s going to take time before you get to a fully liquid market.”