On May 7, 2021, in Singapore, Malaysia’s state-owned Petroleum company, Petronas, announced that it had signed its first liquefied natural gas (LNG) deal using Canada’s pricing indications as a basis. Petronas is one of the largest corporations globally and is a major petroleum and gas regulatory authority in Malaysia, owned and operated by the government of Malaysia. The company focuses on developing the value of existing resources in Malaysia and proposes projects to aid in the development and discovery of more natural resources.
The deal involves Petronas LNG selling spot LNG cargo to a buyer in the Far East for August shipments using the Canada Alberta Energy Company (AECO) Index. The AECO is Canada’s natural gas price, similar to the Henry Hub Index in the United States, but is not commonly used as pricing for LNG spot contracts.
According to a trader, vendors are urging sellers to use the AECO price index, particularly with the Royal Dutch Shell’s large-scale LNG Canada export project in British Columbia, which is currently under construction and will produce its first LNG in 2024. The LNG Canada project is a joint venture between Canada Shell, Petronas, PetroChina Co., Ltd., Mitsubishi Corporation, and Korea Gas Corporation. In Asia, the S&P Global Platts ‘Japan Korea’ marker (JKM) has been increasingly used as a price base in spot contracts.
However, the introduction of AECO is part of a plan to add additional pricing options for customers. As stated by a Singaporean businessman, “The sale of spot cargo at the price attached to it is an important step towards establishing a transparent price index in the LNG market, which can meet not only the supply of patterned price increases for cargo but also when it comes to commercial delivery.” Other pricing standards used in spot LNG contracts include Japanese Crude Coal (JCC), Brent Futures, and UK National Balance Point (NBP).
The use of AECO as a pricing basis is expected to provide more flexibility and transparency in the LNG market. The deal between Petronas and the buyer in the Far East marks a significant development in the LNG market, as it is the first time that the AECO index has been used as a pricing basis for an LNG spot contract.
According to a statement by Petronas, “The introduction of AECO is part of a plan to add additional pricing options for its customers.” This move is expected to cater to the supply of LNG from Canada, which will start when the LNG Canada project begins production in 2024. As noted by a trader, the use of AECO as a pricing basis is likely to become more common in the future, particularly with the increasing importance of the LNG Canada project in the global LNG market.
The LNG market is expected to continue growing in the coming years, driven by increasing demand for natural gas as a cleaner-burning fuel. The use of AECO as a pricing basis is likely to play a significant role in this growth, as it provides a transparent and flexible pricing option for buyers and sellers.
As stated by the International Energy Agency (IEA), “LNG is set to play a major role in the transition to a lower-carbon energy system, and the development of new pricing options such as AECO will be important in supporting this growth.” The deal between Petronas and the buyer in the Far East is an important step in this direction, and it is likely to have a significant impact on the future of the LNG market.
The signing of the first Canadian-indexed LNG deal by Petronas marks a significant development in the LNG market, as it introduces a new pricing option and provides a transparent and flexible basis for buyers and sellers. The use of AECO as a pricing basis is expected to become more common in the future, particularly with the increasing importance of the LNG Canada project in the global LNG market.
As the LNG market continues to grow, the development of new pricing options such as AECO will be important in supporting this growth and providing a more transparent and flexible market for buyers and sellers.
