oil ad gas( Energy economics)
Will LNG become a similar global commodity to oil?
The international oil industry can claim its history back to the mid- to late-1800s, and has developed
into the energy life blood of all global economies, whether they be oil producing nations or insatiable
consumers. Natural gas a close relative of crude oil was long considered an afterthought of crude
production, and has always been constrained by an inability to store and transport the product, unless
the gas wells were situated very close to the consumer.
Liquefied Natural Gas (LNG) overcomes those two problems, and whilst the technology was proved
commercially viable in the 1940s, only for the past 40 years has the shipping technology evolved to
enable the deep-sea movement from producing gas fields to the major markets. The major
disadvantage of LNG is the requirement to build expensive infrastructure to liquefy the gas at the
production site and further re-gasification facilities within the consuming territories.
Traditionally, the market for LNG and Natural Gas was separated into distinct regions North
America, Europe and the Asia Pacific region. Natural Gas was moved by pipeline to consumers and
pricing based on linkage to the crude oil price on the argument that this was the benchmarked
competitive alternative fuel. Many supply contracts were very long term, and access to distribution
systems controlled by nationalised gas companies, contributing towards a severe limitation of spotmarket
sales. These markets were long-term orientated and inflexible.
LNG shipments have started to change these characteristics, although the costs of building
liquefaction trains and committing to shipping contracts, has led to the LNG industry being typified by
producers reaching 20- and 25-year contractual positions with major utility companies.
The Shale Gas explosion in the USA could be a potential game-changer and catalyst for further
changes in market structure, but can this really lever LNG away from oil price-linked contracts and
establish a spot market, with liquidity and transparency to build a global commodity market in LNG, in
similar fashion to New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE0 in
London and the Brent and West Texas Intermediate (WTI) benchmark crudes?
Your task is to discuss, after reading and research, the prospects of LNG becoming a global
commodity in the next 40 years of its evolution? In particular, your Report should discuss and
analyse, amongst other issues, the following:
What are the prospects for LNG in the USA, and can the Shale Gas explosion both satisfy
domestic demand and create a healthy potential for exports?
What drivers are forcing buyers and sellers of LNG to move away from the traditional longterm
contracts and long-term contract pricing?
Can a more transparent market in LNG trades be established with the old linkage to oil prices
being supplanted by some other pricing mechanism?
What is required in your 3,000-word Report, and forming the basis of assessment and marking,
is your own analysis and conclusions reached by interpreting the content of the Module,
together with a wide range of commentary on this topic derived from your own research.
Describe current oil and gas market trends and relate current
conditions to historical market performance.
Explain basic oil and gas market dynamics, with especial
reference to consumer and producer reactions to price
Illustrate how the trading environment, including market
conditions and competitive forces can influence corporate
strategy within the oil and gas industries.
Evaluate the significance of supply and demand factors to
decisions relating to pricing and output policies.
Constructive critical analysis, introduction
and conclusions. Demonstration of a clear
understanding of the issues. Use of
academic models. Full articulation of ideas
developed. Offering well-argued solutions
Format, referencing, bibliography. Rigorous
use of the Harvard Methodology for citation
and referencing; page numbering; correct
format for direct quotations.
Content, style, relevance, and originality.
Clear demonstration of rigorous research
from recognised authoritative sources.
Audience focus. Meeting the deliverables.