Gas
Material, Processing and Power Technologies
Abstract
The LNG price formula is one of the most critical factors in LNG contract
negotiations. When buyers and sellers argue for different formulas during
negotiations, there is no mutually agreeable way to compare these formulas
with different slopes, constants or kink points, not to mention of other
conditions like quantity tolerances and seasonality, into the evaluation.
As a result, buyers and sellers adhere to subjective arguments, frequently
causing negotiations to become deadlocked. Therefore, the establishment
of a metric for valuing LNG formulas will lead to more efficient negotiations.
In this paper, we suggest a financial engineering approach, proposing
a methodology for valuing LNG price formulas utilizing the "market value"
concept. From the standpoint that cash flows linked with future crude
oil prices can be replicated by crude oil derivatives, we observed that
LNG prices determined by formulas linked with crude oil prices can also
be replicated by crude oil derivatives, and define the market value of
these derivatives as the "market value of LNG price formulas". We then
propose a valuation methodology therefore sing a well-known financial
model and market data. This methodology can be applied to S-curve formulas.
It can also be applied to natural gas (e.g. Henry Hub) linked formulas
as well as crude oil (e.g. JCC) linked formulas.
Our proposal would enable quantitative comparison of different price formulas
according to a "market value" scale defined. It would also enable the
generation of alternative price formulas that have equivalent "market
value" but different shapes. This methodology would help buyers and sellers
to reach agreements efficiently. This is a first step toward a new framework
that allows buyers and sellers to negotiate LNG contracts according to
a "market value" scale.
