An Introduction To LNG Fuel Pricing

Introduction

Procuring LNG fuel usually means taking out a term contract, typically for one to five years. Increasing competitiveness in more mature ports and regions, such as the Amsterdam-Rotterdam-Antwerp (ARA) ports area and the Baltic, is leading to a shortening in the duration of term contracts. In these locations we are seeing the emergence of more flexible and short-term trades. These include ’spot’ bunkers traded a couple of weeks or even days ahead of delivery. Most LNG bunker volume is contracted on long-term contracts, however.

Within term contracts – and similarly to pipeline gas sales – LNG fuel prices are typically either gas-indexed or oil-indexed. This means they escalate in line with either gas prices quoted by hubs such as the Netherlands’ Title Transfer Facility (TTF), or with Brent crude oil or gasoil quotes. However, for short-term or occasional bunker trades, the LNG fuel price can be fixed, i.e., it is independent of future developments in gas or oil prices. Simplified, price escalations follow this structure:

LNG price = Alpha * Index + Add-on,

Like traditional bunker fuels, LNG fuel price structures can be split between a commodity component (the LNG market value) and a logistic component, which is the…