Natural gas is the third most important source of energy after oil and coal. The use of natural gas is growing quickly and is expected to overtake coal in the second spot by 2030.
Natural gas was first developed commercially in 1825 in the United States, but took off as a major source of energy around the world in the 1970s. Today, natural gas is used by power plants to generate electricity, as well as for domestic cooking and heating.
The world’s largest producers of natural gas are currently the United States, Russia, Iran, Qatar, Canada, China and Norway. These countries have excess natural gas that can be exported to other countries around the world, which is either transported through pipelines or as liquefied natural gas (LNG).
LNG is natural gas that has been cooled to a temperature of minus 260 degrees Fahrenheit, or minus 160 degrees Centigrade. At that temperature, natural gas becomes a liquid and can be transported around the world by special refrigerated transport ships.
When it reaches its final destination, the LNG is allowed to regasify and can be sent through the normal pipeline system. Before the development of LNG, gas markets around the world operated independently, as they were based on local pipeline networks.
The three most developed demand centers for natural gas are western Europe, North America and north Asia. These regions have dense pipeline networks and high demand for natural gas.
Natural gas is the fastest growing energy source in north America. There are dozens of natural gas trading hubs around the United States. But by far the most dominant is the Henry Hub in Louisiana. Henry Hub is strategically situated in a major onshore production region and is also close to offshore production.
Henry Hub also has excellent connectivity to storage facilities and to pipeline systems. This allows natural gas to be moved from supply basins and exported to major consumption markets. This highly integrated network is served by both interstate and intrastate natural gas pipelines. It is no surprise that the price of natural gas at Henry Hub has become the dominant global reference price for natural gas. Henry Hub is the delivery location for Natural Gas futures contracts at CME Group, the largest gas futures contract in the world.
In western Europe, gas is the dominant fuel for electricity production. Prices are set at several trading hubs around the region. The two most important hubs in the region are the National Balancing Point or NBP in the UK and the Title Transfer Facility or TTF in the Netherlands. CME Group lists futures contracts based on both the NBP and TTF.
In Asia, there tend to be fewer pipeline connections between different countries than is the case in Europe and North America. This explains why, until now, there has been no major price benchmark for natural gas in Asia. But this situation is changing with the increase in Asian imports of natural gas in the form of LNG. Platts, the price reporting service, assesses the north Asian LNG price through its Japan/Korea Marker or JKM index, which is listed for trading on CME Group.
The development of LNG means all the major production centers are now linked to the major demand centers. For the first time in history a truly global gas market is evolving.