Natural gas and LNG

Natural gas is mostly methane, and its defining problem is that it is a gas. Moving it requires either a pipeline or the expensive detour of chilling it to minus 162 degrees Celsius, shipping it as a liquid and turning it back into gas at the other end. That single fact explains why gas has regional prices while oil has one world price.

Liquefied natural gas is the arbitrage between those regions, but it is capacity-constrained: a cargo can only go where a terminal can receive it, and building either end takes years. When the arbitrage is open, prices converge; when liquefaction capacity is full, they do not, however wide the gap.

Units are a mess. North America quotes dollars per million British thermal units, Europe euros per megawatt hour, and cargo volumes come in cubic metres or tonnes of LNG. One megawatt hour is roughly 3.41 million British thermal units, which is the conversion behind most confused comparisons.

Gas has three big jobs: generating electricity, providing industrial heat, and heating buildings. A fourth, smaller but strategically important, is chemistry - gas is the feedstock for ammonia, and therefore for most of the world's nitrogen fertiliser.

The power sector is the swing user. When gas gets expensive relative to coal, generators switch where they can, and that switching puts a soft ceiling on the price. When it gets cheap, the switch runs the other way. This is why gas and coal prices track each other more closely than either tracks oil.

American shale changed this market twice: first by making the United States self-sufficient, then by turning it into the largest LNG exporter and linking Henry Hub to the rest of the world for the first time.

Qatar's position is different in kind. Its North Field is the largest single gas field in the world, its liquefaction costs are among the lowest anywhere, and its expansion projects are large enough that their start dates move the forward curve years ahead.