A glut of supply and big changes in the natural gas market have created the right conditions for the world's first futures contract for overseas gas shipments, with a likely home in Dubai, says the head of the Dubai Mercantile Exchange.
DME sees new gas futures
A glut of supply and big changes in the natural gas market have created the right conditions for the world's first futures contract for overseas gas shipments, with a likely home in Dubai, says the head of the Dubai Mercantile Exchange (DME) . Gas exporters in the Gulf would experience less volatility if their prices were determined on a futures exchange like other commodities instead of being linked to crude oil prices, Thomas Leaver, the DME's chief executive, said yesterday. The proposal for a new futures contract was still in the early stages, with the DME now requesting feedback from liquefied natural gas (LNG) producers and consumers, he said.
"I think there are some compelling reasons why it should be reviewed and looked at," he said at a gas conference in Abu Dhabi, in reference to LNG's price link with oil. "Without clear and unfettered price signals from the market, it's very difficult to make investment decisions on multi-billion-dollar projects." LNG has historically been sold on long-term contracts that require buyers to take a minimum amount of gas and base their prices on crude oil. The model was devised to cover the huge capital cost of LNG production plants at a time when gas sales were divided into regional markets and LNG was treated as a substitute for oil.
But an increasing proportion of LNG is now bought and sold on the spot market, Mr Leaver said, with the proportion expected to rise above 20 per cent by 2012, from 13 per cent in 2008 and only 2 per cent in 2000. "With that kind of growth, there is a proposition that a futures contract could be developed, based on an exporter from the Middle East," he said. Gas markets are in the midst of a historic shake-up, with demand growth fizzling in the US as a result of a jump in domestic gas output at the same time as huge new production facilities are inaugurated in the Middle East, Australia and Russia. The oversupply has caused prices for LNG shipments on the spot market to Asia to fall by more than 75 per cent compared with their record highs in the summer of 2008.
Dubai would make an ideal location to base an LNG futures contract, Mr Leaver said. Qatar is the world's largest LNG producer and gas firms across the Gulf are well positioned geographically to send gas shipments to East Asia or Europe and the US, the big markets. The Dubai Multi Commodities Centre announced plans in 2006 to set up an LNG storage facility that could form the basis of a derivatives market. The DMCC has disclosed little progress on the project in the past year.