The rebirth of liquefied natural gas (LNG) as an economic alternative for new deliveries most likely will significantly alter the trading patterns of natural gas within 25 years, ultimately transforming gas into a globally traded commodity, similar to how oil is traded worldwide today, according to a new study by economic consultant DRI-WEFA. This shift in trading patterns, said the authors, will improve the security of supply and maintain gas prices, which will be driven by the U.S. benchmark price.

The DRI-WEFA report, an annual review of natural gas supply and demand, found that by 2025 Europe’s reliance on gas imports will grow more than a third, to 67% from its current 40%. Most of the imported gas will be via LNG, which would avoid the need to develop “complicated transit deals through third countries, making the contractual positions slightly easier to negotiate.” These changes in how gas is traded will affect the market worldwide, including the United States.

Although the quantities of LNG trade were never large enough to have any influence over prevailing gas prices in either the United States or Europe, “this is about to change,” said the report. “Projects in Trinidad, Norway, Nigeria, Egypt and elsewhere are being developed with both markets in mind. It is therefore likely in the future there will be a sufficient number of LNG projects that will have the flexibility to supply both continents. Spot prices in the U.S. are transparent to all observers and although the European markets are more opaque, there is sufficient price data available” at the UK and Zeebrugge hubs to “easily measure the trading opportunity.”

If prices were to fall, noted the report, “then the surplus will quickly be shipped to the U.S., until a balance in pricing is reached.” Ultimately, this “means that European prices will be driven by the U.S. benchmark price at Henry Hub, which in the past has generally been similar to the oil indexed gas price. We therefore believe that within a short space of time, natural gas will become a globally traded commodity, much as oil is today.” As a general rule, gas pricing in Europe “will remain fairly closely linked to the oil indexed price and will not fall close to the costs of production. The link to the U.S. market will form the ultimate link to gas competition in the market and will not stop at the boundaries of Europe, as some pundits are suggesting.”

The report, now in its 15th year, is an annual study of the European gas market, which forecasts the outlook until 2025 by DRI-WEFA, a subsidiary of Global Insight Inc. To learn more about the study, visit the web site at www.dri-wefa.com.

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