UNDERSTANDING LNG AND GLOBAL GAS LINKAGES

What is LNG and how is it produced?

Liquefied Natural Gas (LNG) is natural gas—primarily methane (CH₄)—that has been cooled to approximately -162°C (-260°F) to transform it into a liquid state. This process reduces its volume by about 600 times, making it easier and more cost-effective to transport across long distances where pipelines are not feasible.

The LNG production process involves several stages:

• Extraction: Natural gas is extracted from underground reservoirs through drilling operations.
• Processing: The raw gas undergoes purification to remove impurities such as water, carbon dioxide, sulphur compounds, and some heavier hydrocarbons.
• Liquefaction: The clean natural gas is cooled through a series of compression and expansion cycles in liquefaction plants (also called LNG trains) until it becomes a cryogenic liquid.
• Storage and Transport: The LNG is stored in insulated tanks and transported via specially designed LNG carriers. These vessels can safely hold LNG at cryogenic temperatures over long distances.
• Regasification: Upon arrival at the consuming country, LNG is converted back into gas at regasification terminals and injected into domestic pipeline networks for use.

LNG technology was developed in the early 20th century, but it gained significant commercial adoption starting in the 1960s. Since then, it has become a key component of the global energy trade, allowing gas to be shipped across oceans, just like crude oil or coal.

The advantage of LNG lies in its flexibility and reach. Unlike pipeline gas, LNG is not restricted by geopolitics or geography. This characteristic allows exporting countries to serve multiple markets and gives importing countries access to diverse sources of supply.

The prominent LNG exporting nations include Qatar, the United States, Australia, and Russia. On the demand side, key markets include Japan, South Korea, China, and various countries in the European Union. As energy security and transition to cleaner fuels become increasingly important, LNG is playing a more central role in global energy policy.

In summary, LNG is a transformative technology that enables the compression, transportation, and regasification of natural gas, making it a globally tradable commodity. Its production and distribution rely on complex infrastructure, but its strategic value in enhancing energy security and supply diversification is widely recognised.

How LNG enables global gas trade

LNG has significantly reshaped global gas trade by introducing flexibility, market integration, and supply security. While pipeline gas relies on fixed routes and long-term bilateral agreements, LNG empowers countries to participate in a more dynamic and diverse global gas economy.

There are several ways in which LNG enables international gas trade:

1. Supply Diversification

LNG offers importing countries access to a wider portfolio of suppliers. European countries, for instance, have increased LNG imports to reduce dependence on a dominant pipeline provider such as Russia. LNG allows diversification not only by source country but also by upstream ownership and market structure.

2. Flexibility of Delivery

The LNG market includes both long-term contracts and spot transactions. Spot LNG—a growing share of the market—allows purchasers to acquire LNG cargoes on short notice based on current market prices and demand. This flexibility is especially beneficial during seasonal demand spikes or supply disruptions.

3. Arbitrage Opportunities

Buyers and sellers can exploit price differences between regional gas markets. For example, if LNG prices are higher in Asia compared to Europe, sellers may redirect cargoes eastward to take advantage of favorable margins. This arbitrage mechanism helps balance markets and smooth out price volatility across regions.

4. Infrastructure Development

The surge in global LNG trade has led to significant investment in export terminals, regasification facilities, and FSRUs (Floating Storage Regasification Units). Emerging markets are increasingly using modular FSRUs as cost-effective entry points into LNG markets.

5. Integration of Isolated Markets

Countries without gas pipeline connections—such as island nations or landlocked regions—can source LNG to meet energy demand. The Philippines, Bangladesh, and several Caribbean nations are tapping LNG to power grids and support industry.

6. Enhanced Energy Security

LNG contributes to national energy security by providing strategic backup options. During crisis events—such as extreme winter storms, political tensions, or pipeline failures—LNG cargoes can serve as vital stopgaps to ensure uninterrupted gas supply.

According to the International Gas Union (IGU), the global LNG trade reached approximately 400 million tonnes in 2022, with over 50 countries participating as buyers or sellers. The increasing liquidity and transparency in LNG markets are driving convergence between regional gas hubs—such as Henry Hub (US), TTF (Netherlands), and JKM (Japan Korea Marker).

Moreover, gas hubs are adopting indexation mechanisms that reflect global LNG dynamics. These include hybrid pricing formulas that incorporate oil-linked contracts, spot market prices, and regional benchmarks. This harmonisation contributes to the emergence of an integrated global gas market.

In essence, LNG bridges the gap between supply and demand across borders, transforming natural gas from a regional to a global commodity. The development of LNG infrastructure and commercial frameworks fosters an interconnected global energy landscape that is more responsive to economic, environmental, and geopolitical shifts.

How global LNG flows link markets

The increasing liquidity and complexity of global LNG flows have tethered previously discrete regional gas markets into a more interconnected and responsive global system. Unlike oil, which has long held global pricing and trade alignment, natural gas was traditionally regionally constrained by pipeline infrastructure. LNG is changing that model.

There are several dimensions through which LNG flows unify global gas markets:

1. Price Interdependency

Global LNG flows enable a form of price contagion between regional markets. When LNG cargoes are re-routed due to higher spot prices in one region (e.g., Asia during winter), shortage effects and rising demand in another region (e.g., Europe) cause tightened supply and upward price movements. Thus, regional events influence global benchmarks more readily.

This link was evident during the 2021-2022 energy crisis when high Asian LNG demand and competition with Europe pushed up benchmark prices like Dutch TTF and UK NBP. Global LNG flows transmitted volatility globally.

2. Freight and Shipping Capacity

The flexibility of LNG trade depends on available shipping capacity. The global fleet of LNG carriers has grown rapidly, but disruptions such as canal blockages or vessel shortages can impact delivery schedules and freight costs. These logistical variables add complexity and align market behaviours as traders collectively respond to logistical bottlenecks or opportunities.

3. Infrastructure Bottlenecks

Chokepoints such as the Panama and Suez Canals influence LNG trade patterns. Seasonal constraints at regasification terminals or delays at loading facilities affect LNG availability. Traders often swap cargoes or redirect shipments to avoid delays, further tying regional dynamics together.

4. Contractual Structures

Modern LNG contracts often include destination flexibility clauses, allowing cargoes to be redirected to different markets. This flexibility has created a global LNG spot market akin to that of crude oil, enabling national gas systems to respond more dynamically to external shocks or arbitrage opportunities.

5. Hedging and Financial Instruments

The growth of financial derivatives linked to LNG and gas benchmarks fosters greater market integration. Futures contracts, swaps, and options on platforms like ICE or CME allow traders to hedge LNG exposure across multiple hubs. This financialisation increases price correlation and contributes to a unified pricing environment.

6. Role in Energy Transition

As countries decarbonise, LNG provides a transitional bridge from coal and oil to lower-emission fuels. Its role in power generation, heating, and industrial feedstocks ensures cross-border collaboration and investment. Global LNG flows link this decarbonisation journey across nations, aligning markets with shared sustainability goals.

With technological advancements—including Floating LNG production, bunkering, and small-scale LNG—markets are becoming more agile. Even Africa and Latin America, once peripheral to global gas markets, are gaining prominence as producers and consumers. This expansion further weaves a fabric of global interconnections.

Finally, the emergence of real-time data analytics and AI in LNG trading platforms is boosting market transparency and reducing arbitrage lag. Traders and policy-makers can now make quicker, data-informed decisions in response to global events, thus accelerating market co-movement.

In sum, global LNG flows serve as arteries in a rapidly globalising gas system. By linking supply chains, pricing structures, logistics, and policy frameworks, LNG plays a pivotal role in knitting together diverse regional markets into a cohesive global energy network.