Prices of natural gas in Europe have skyrocketed to levels scarcely seen before 2021. European governments, especially those soon up for reelection, are understandably concerned about the future. That future is undermined by the economic hardship being caused by high energy prices. Not surprisingly, there is a search for the culprit, beyond Russia of course! After all, someone is experiencing a windfall in profits for natural gas as the price of the fuel in Europe is many times higher than prices in countries exporting gas to Europe in the form of liquified natural gas (LNG). Some, like German economy minister Robert Habeck, have begun to criticize the US and other “friendly” LNG supplier countries, of profiting from “astronomical prices.” French President Emmanuel Macron, not to be outdone, accused the US of a “double standard” because “American gas is 3-4 times cheaper on the domestic market than the price [of LNG] at which they offer it to Europeans.
While US LNG exporters are doing well by any measure in the recent market environment, they are not the ones reaping most of the benefits of tight markets and exorbitant prices in Europe. The reason is that US LNG exporters’ contracts are structured differently in terms of pricing and flexibility from those of virtually every other LNG supplier globally.
To begin, US LNG is priced on the basis of Henry Hub (HH), a pipeline interconnection point near the US Gulf Coast that serves as the major market exchange point for both physical and future contracts in the US. US HH prices have increased significantly over the last year or so but pale in comparison to the prices in the European hub (See Figure 1 for comparison of prices in the US (HH), Europe (TTF) and Japan). US LNG contracts are generally either service contracts — where the US company never owns title to the LNG — or sales contracts delivered based on the “free-on-board” (FOB) principle. In both cases, US LNG exporters cease to have any custody or ownership over their product when LNG is transferred onto an LNG tanker at the US plant’s loading dock. From then on, it is up to the buyer where and for what price the LNG is sold. In fact, EU competition law purports to make it unlawful for a seller to Europe to control the destination or price once the seller no longer has title to the LNG! Currently, given high prices, Europe is one of the major markets for this gas but it is not the US LNG exporters or US gas producers who pocket the steep price difference between HH and European spot prices. It is the “middle men” companies who buy natural gas or LNG in the U.S and sell LNG in Europe that receive the windfall.