As far fetched as yesterday's Marcellus to NBP price linkage might seem, the next theory flies completely against the Conventional Wisdom. The CW say that European gas prices will rise because of competition for Asia LNG. I've pointed out several times that there will be plenty of LNG from multiple sources,but the CW still sees the future in terms of the past of LNG being priced against oil linked contracts.
Predicting the future of chaotic systems such as energy prices is pointless. On that, and much else, we should listen to Daniel Kahneman more often:
SPIEGEL: Experts, for example, have gathered a lot of experience in their respective fields and, for this reason, are convinced that they have very good intuition about their particular field. Shouldn't we be able to rely on that?
Kahneman: It depends on the field. In the stock market, for example, the predictions of experts are practically worthless. Anyone who wants to invest money is better off choosing index funds, which simply follow a certain stock index without any intervention of gifted stock pickers. Year after year, they perform better than 80 percent of the investment funds managed by highly paid specialists. Nevertheless, intuitively, we want to invest our money with somebody who appears to understand, even though the statistical evidence is plain that they are very unlikely to do so. Of course, there are fields in which expertise exists. This depends on two things: whether the domain is inherently predictable, and whether the expert has had sufficient experience to learn the regularities. The world of stock is inherently unpredictable.
SPIEGEL: So, all the experts' complex analyses and calculations are worthless and no better than simply betting on the index?
Kahneman: The experts are even worse because they're expensive.
SPIEGEL: So it's all about selling snake oil?
Kahneman: It's more complicated because the person who sells snake oil knows that there is no magic, whereas many people on Wall Street seem to believe that they understand. That's the illusion of validity …
That's what I'll have to call the CW from now on: Validity Illusion Syndrome. I've mentioned Daniel K several times over the years and I've echoed him as he points out that not only are they (the CW) worthless, "even worse they're expensive".
With that caveat, my theory might be equally worthless. It goes like this: Later on in this decade, once we have North Amercan and Australian LNG exports bumping each other in the Japanese market, the obvious happens. But what if it happens even sooner?
Japanese utilities are weighing the option of indexing a portion of the import price of their LNG procurements from North America to gas price benchmarks such as Henry Hub, rather than solely to crude oil, a Japanese government official told Platts late Thursday in Calgary.
"It is still early days, but this is likely to be a trend, with our utility firms preferring the Henry Hub as part of a portfolio of prices," Hirohide Hirai, Director of Petroleum and Natural Gas at the Ministry of Economy, Trade and Industry, said in an interview.
This would be for the risk mitigation of not depending solely on Japan Customs-cleared Crude or JCC prices, and also for securing a cheaper price, he said. "We would be open to new forms of pricing and, as a suggestion, Japanese utilities could think of indexing to the Henry Hub 5-10% of their North American LNG purchases."
Only 5-10%? But as Hirai notes, it's early days. Imagine the percentage in 2017, and then understand the impact on European LNG prices won't be so scary. But although they use more far less than Japan, it's China's demand used as the other CW reason for higher European and LNG prices. If you are poster boy for Validity Illusion Syndrome, Alistair Buchanan of Ofgem, now sadly entering the terminal stage, you become so convinced that prices will rise that you think that Rusia is going to sell their gas to China instead and it's lights out Europe. Poor man. Quite apart from the lack of pipelines, we see this from the current meeting between Putin and Hu Jin Tao:
Despite what would seem to be a confluence of needs on energy, there was little chance that Russia and China would resolve the outstanding differences over delivery of gas to China in time for an agreement between the two leaders, Arkady V. Dvorkovich, a vice prime minister, said on the eve of the visit. The sticking point after two decades of talks remained price, with Russia wanting to sell its gas at $350 to $400 per 1,000 cubic meters, while China is prepared to pay only $200 to $250, according to Chinese press reports.
Indeed, the English language newspaper China Daily recently reported that China, frustrated by the stalemate on gas price between China National Petroleum Corporation and Gazprom, increased its supplies from Turkmenistan, a sign of how Beijing’s economic strength allows it to play the market.
Even so, the atmospherics on energy had improved and there was now an “opportunity for both sides to unfold a new age of energy cooperation,” said Xu Xiaojie, a former director of investment of overseas investment for the China National Petroleum Corporation.
In short, everything is hunky-dory and the former fraternal socialists are such good friends that they agree on everything except for that little price thing. If Gazprom is miffed that Europeans won't pay oil linked prices from mature fields in Europe where the cost is pushing zero, then the VSS ask us to believe that the Russians will rather spend billions on new fields and pipelines to sell the gas to the Chinese at half the price. I'm not saying that theory is wrong, merely pointless, because then rather obviously China LNG prices come down as well. Which puts another nail in the coffin of high prices.