Gas markets have traditionally been fragmented into separate regions or countries because of the need for pipelines to connect producers and consumers in different parts of the world.

The emergence of LNG -- liquefied natural gas -- is changing that concept and bringing different regions together. LNG is supercooled gas that can be transported across the oceans on a special tanker. This means that for the first time ever gas can flow from one region of the world to another.

LNG projects are very complex and expensive and so developers have tended to lock in their buyers to very long-term contracts. The development of U.S. LNG is following a different model. Many U.S. producers are happy to sell individual cargoes of LNG to the highest bidder, leading to the development of a spot market for LNG.

More Investment

With global demand for LNG increasing, investment in LNG facilities has increased as well. According to the International Energy Agency (IEA), total investment in LNG has topped a record $50 billion for 2019, with the bulk of investment occurring in the United States and Canada.

In the U.S., natural gas production is expected to average 91.6 billion cubic feet (bcf) per day in 2019, up 10% over 2018, according the Energy Information Administration (EIA). Total exports of LNG from the U.S. are expected to rise 53% over 2018, according to the EIA.

Pricing and Hedging

The typical next step after the development of a spot market is for a clear and transparent price benchmark to emerge. The dream of a single interconnected global gas market came one step closer on October 14 with the launch of CME's Gulf Coast LNG Export futures.

But before the launch of LNG futures, there was no benchmark in place that would allow U.S. producers or their buyers to sell on a floating index. The new launch addresses this issue by providing a settlement price that can be used as the basis for physical trade in the U.S. LNG export market.

The other challenge facing U.S. LNG market participants was their inability to lock in their economics by hedging their future commitments to buy or sell.

Many traders have been using CME's Henry Hub benchmark as a rough proxy for Gulf Coast LNG, in part because of its enormous liquidity: Henry Hub represents around 86% of natural gas derivative trading around the world.

But the interconnectivity of the global LNG market means that sometimes U.S. LNG export prices can move apart from Henry Hub, which represents the domestic price of U.S. natural gas. High demand or the prospect of cold weather in northern Asia can sometimes make U.S. LNG prices increase, even when the domestic market is calm, for example.

Transition to Cleaner Energy

LNG's ability to improve the connections between the various international gas markets is widely expected to lead to increased price convergence between the different regions of the world. This would be the first time that we could talk about a genuine global gas price.

Establishing a global gas price is a crucial step not only in making the LNG market more efficient, but also in the drive to mitigate the potential impact of climate change.

Natural gas, particularly in the form of LNG, is steadily displacing coal in the power generation sector around the world. Japan remains the world's largest LNG importer, but the largest growth is coming from China, according to the IEA. While both countries still consume coal as a major part of their energy mix, natural gas consumption is growing. In Japan, gas has become, and is expected to remain, the country's largest electricity generation source.

A transparent global gas price will allow companies and policymakers to accurately estimate the cost of switching between coal, gas and other generation fuels. Matched with increasing investment and exports, it is another sign of the acceptance of natural gas as a top global energy source for decades to come.

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(This article is sponsored and produced by CME Group, which is solely responsible for its content.)