For many years, this was the norm..oil prices were around $18-$20 /bbl, and LNG import prices in North Asia were around $3 - $5 per MMBtu, with slightly lower prices in US and Europe. In 2006 or so, oil prices started to rise from the sub-$20 / bbl levels. At first, gas prices kept pace with these increases. However, as oil prices crossed the $50 mark, this relationship began to diverge, with gas prices generally (apart from some local peaks) staying below the oil price parity levels. Between 2003 and 2008, the average oil price was $51.8 / Bbl, while the Henry Hub gas price averaged $6.8 / MMBtu, a 21% discount to oil parity (which would be $8.6 / MMBtu). Oil prices have kept on rising, and in May 2008, Japan Crude Cocktail JCC oil prices had risen to an $16.5/MMBtu, but Henry Hub was trading at below $12/MMBtu, a discount of nearly 30%.

Many LNG contracts, negotiated when oil was trading at $20/bbl, have caps to prevent gas prices from rising with oil prices. This may explain why some LNG contractual prices have not kept up with oil price increases, but does not explain the divergence in open competitive markets like UK and North America. Naively, companies promoting LNG or other gas export projects today are justifying their projects, which have been subject to huge cost increases due to increases in steel and labor, by forecasting a long-term oil parity price for their sales gas. This is dangerous. History has shown us that gas prices do not rise as high as oil prices, and that the main competition to gas is coal, not oil. Coal prices have risen, but not as much as oil prices. Gas project sponsors looking for long term buyers willing to commit to 10 or more years at parity prices may be disappointed. Oil customers are more short-term focused and may be willing to pay the current high prices; I would argue that gas customers would be very reluctant to sign long-term deals at $20 /MMBtu levels. It will be interesting to monitor prices negotiated for new LNG contracts over the next year or so. Would they be at the $10 -15 / MMBtu levels, already very high as compared to historical levels, or would they be at over $20 / MMBtu, at the oil price parity that is expected by the project sponsors? We live in interesting times.