Some risks related to the short‐term trading of natural gas

Traditionally guided by long‐term contracts, the international natural gas trade is experiencing new methods of operating, based on the short term and more flexibility. Today, indeed, the existence of uncommitted quantities of natural gas, combined with gas price discrepancies among different regions of the world, gives room for the expansion of the spot‐trading of gas. The main objective of this paper is to discuss three fundamental risks related to the short‐term trading of natural gas: volume risk, price risk and infrastructure risk. The defenders of globalisation argue that the transition from the long‐term to the short‐term trading of natural gas is mainly a question of access to gas reserves, decreasing costs of gas liquefaction, the building of liquefied natural gas (LNG) fleets and regasification facilities and third‐party access to the infrastructure. This process needs to be as short as possible, so that the risks related to the transition process will disappear rapidly. On the other hand, the detractors of globalisation put the emphasis on the complexity of the gas value chain and on the fact that eliminating long‐term contracts increases the risks inherent to the international natural gas business. In this paper, we try to untangle and assess the risks related to the short‐term trading of natural gas. Our main conclusions are listed over the page: 1 the short‐term trading of gas is far from riskless; 2 volume risk requires stock‐building in both consuming and producing countries; 3 price risk, through the high volatility for gas, induces an increase in options prices; and 4 there is no evidence to suggest that money‐lenders' appetite for financing gas infrastructure projects will continue in a short‐term trading system, and this would be a threat to consumers' security of supply.