It's probably not quite here yet, but the trend is unmistakeable; the world is moving to a globally-linked natural gas market and the rise of liquefied natural gas (LNGLF) (LNG) is the key driver.
Much of the increase in LNG capacity is because of the rapid boost to plants in Australia and the United States, as both countries take advantage of abundant local reserves of natural gas to muscle in on a market that until recently had been dominated by a few established producers and buyers.
But it is perhaps ironic that while the action on the capacity side of LNG is an Australian and American story, the ultimate controlling player of the emerging global natural gas market is likely to be Europe.
This is because Europe is likely to act as a "clearing house" for surplus LNG cargoes, given it has excess re-gasification capacity and the ability to use the fuel for a variety of purposes, from power generation to manufacturing to household heating.
Europe is also the only region that can effectively arbitrage between LNG and pipeline prices, given its connection to Russian and other Eastern natural gas via pipelines.
The continent is also best-placed to use market forces to find a price level for natural gas versus its competitors, given it still has substantial coal-fired power in some countries as well as being a leader in renewables such as wind and solar.
To understand Europe's role in the LNG market, it's worth examining how the dynamics of trade in the super-chilled fuel are changing with the rise of Australia and the United States.
LNG has traditionally been an opaque and tightly-controlled market, where a small number of exporters signed long-term, oil-linked contracts with an equally small number of buyers, who were more concerned about energy security than price.
The major producers included Qatar, Indonesia and Malaysia, while the top buyers were concentrated in North Asia, namely Japan and South Korea, and also in Europe.
It was inevitable that this situation would be disrupted once global energy giants such as Chevron (CVX), Royal Dutch Shell (RYDAF), ConocoPhillips (COP) and Exxon Mobil (XOM) decided to pour some $200 billion into developing eight new LNG projects in Australia.
Three of these are ground-breaking ventures based on using coal-seam gas as feedstock, one is the biggest floating LNG project and the rest are conventional offshore gas to onshore liquefaction plants.
When the last of these new plants is operating, most likely by 2018, Australia will have around 80 million tonnes of annual LNG capacity, overtaking Qatar as the top exporter of the fuel.
Not far behind Australia on the development scale is the United States, with 16 million tonnes of LNG capacity already operating at the Sabine Pass facility in the Gulf of Mexico.
A further 60.5 million tonnes of annual capacity is under construction, and will arrive from late in 2017 to the end of 2019, with the bulk scheduled to be commissioned in 2018.
LNG THE LAST TO BOOM AND BUST?
The International Gas Union (IGU), the industry's lobby group, said in its annual review in April that there was 340 million tonnes of LNG capacity as at the end of 2016, and a further 114 million tonnes under construction as of the start of this year.
In some ways, LNG is the last cab off the rank in the commodity boom that saw massive capacity expansions in iron ore, coal and crude oil as part of the recovery from the 2008 global recession.
Much of the investment in commodity projects was driven by the belief that China, the world's top commodity consumer and importer, would continue to soak up everything the world could throw at it.
As can be seen from the five years of price declines for coal and iron ore from 2011 to 2015, this was a forlorn hope, even though China has continued to increase its imports of natural resources.
LNG is equally likely to move into an oversupply situation by 2020, notwithstanding increased imports by China and the emergence of new buyers in Asia, such as Pakistan and Singapore.
It's this oversupply dynamic that is changing the way LNG is traded, with buyers no longer willing to lock into long-term contracts linked to the price of crude oil.
While it will take several years for these contracts to disappear entirely, buyers are having success in negotiating shorter-term deals, or even taking more spot cargoes.
As a consequence, the spot price of LNG in Asia <LNG-AS> has plummeted in recent years. From a record $20.50 per million British thermal units (mmBtu) in February 2014, LNG was last at $5.40 in the week to June 23, down nearly 75 percent.
The drop in Asian spot LNG prices has led them to converge with prices in Europe, with the British National Balancing Point (NBP) price actually exceeding the Asian spot price in May and June last year, according to the IGU.
The difference between the two benchmarks averaged just 91 cents per mmBtu in 2016, the IGU said, showing how dramatically the Asian premium has narrowed in recent years, having been as high as $6 per mmBtu at the end of 2013.
Front-month NBP futures ended at the equivalent of $4.88 per mmBtu on June 28, meaning spot the Asian LNG price commanded a premium of just 52 U.S. cents.
Benchmark U.S. Henry Hub natural gas futures were at $3.067 per mmBtu on June 28, showing that the three main regional benchmarks are fairly close to each other.
This becomes even more the case when the approximately $1.50 per mmBtu cost of liquefaction, already included in the spot Asian price, is added to the NBP and Henry Hub prices.
The economics of the LNG market then come down to shipping costs across various routes, and it's here that Europe comes into its own.
It's highly unlikely that Australian LNG will flow to the Atlantic Basin, given the long sea voyage, which adds to the cost but also increases the loss from boil-off of the LNG being shipped.
This means Australian LNG will have to find a home in Asia, either among traditional buyers or emerging markets in Southeast Asia, where its geographic position gives it an advantage over Qatar and producers in Africa or the United States.
The swing supplier will likely be the United States, which can ship to both Europe and Asia, as well as Latin America.
It's also likely that Qatar may feel increasing pressure in Asia as it has to compete with new Australian supplies, meaning it either has to find new buyers in East Asia or push more cargoes westward to Europe.
FLOWS SHOW CHANGING WORLD
The new dynamics of LNG trade can already be seen in flows around the world.
In 2016, 278.9 million tonnes of LNG moved by ship globally, according to vessel-tracking and port data compiled by Thomson Reuters, a 7.6 percent hike from the 259.2 million shipped the prior year.
Of that total, 41.7 million tonnes went to Europe, while 156.5 million went to North Asia, which includes Japan, South Korea and China, and 33.2 million was shipped to the rest of Asia.
Back in 2013 total LNG trade stood at 243.9 million tonnes, with 38.5 million going to Europe, 151.5 million to North Asia and 17.7 million to the rest of Asia.
What this shows is that Europe and North Asia grew slowly in the past four years, while emerging Asia surged on the back of rising imports by India and newer buyers such as Singapore and Pakistan, and even by traditional exporters like Malaysia.
Looking at the breakdown by exporting country shows that Australia has gone from shipping 23.7 million tonnes in 2013 to 46.1 million in 2016.
Of Australian shipments in 2016, 39.6 million tonnes went to North Asia, up from 21.4 million in 2013.
Qatar shipped 34.7 million tonnes to North Asia in 2016, down from 40.5 million in 2013.
It seems clear that Australia is supplanting Qatar as the main supplier to North Asian markets, a trend that's likely to continue as the Pacific nation brings another 40 million tonnes of LNG capacity on line by 2018.
Qatar has had success in boosting its shipments to the rest of Asia and to Europe, but it will also face pressure in those markets.
Australia has gone from shipping 65,900 tonnes, or just one cargo, to the rest of Asia in 2013 to supplying 3.1 million tonnes in 2016, and it's likely that its producers, especially those on the northwest coast, will be trying to gain a bigger foothold in markets like India and Sri Lanka.
Overall, the global LNG market is becoming more competitive, driven by increased supply and buyer demands for more flexibility.
These trends are set to continue in the coming years, creating a far larger spot market and likely seeing the demise of restrictive destination clauses and oil-linked pricing.
It's also the case that much of the demand growth for LNG will be concentrated in Asia, but that doesn't necessarily mean the region will become the hub for LNG.
The main problem in establishing an LNG trading hub is that the fuel isn't just simply a natural gas version of crude oil.
Long-term storage is problematic given the boil-off that occurs when LNG is placed in land-based tanks or on ships.
While newer LNG vessels can use boil-off as fuel for the engines, it's unlikely that LNG can be stored and traded multiple times, as is currently common in crude oil.
Singapore would like to become Asia's LNG hub, but this would require massive infrastructure investment and the development of a regional pipeline system that would allow LNG to be re-gasified and then transported and stored.
While this may happen over time, the absence of storage and interconnecting pipelines across Asia limits the continent's chances of being the centre of the LNG universe.
Rather, it's Europe with its plentiful re-gasification capacity and pipeline and storage infrastructure that can play that role.
Among European countries, Spain has the best potential as an LNG hub, given its proximity to Qatar (through the Suez canal), West and North African producers and the United States.
Spain has 49 million tonnes per annum in re-gasification capacity, but only 21 percent of this was being utilised in January this year, according to the IGU.
Elsewhere in Europe, Britain has 35 million tonnes of re-gasification but, like Spain, only 21 percent was in use in January.
In contrast Japan's 197 million tonnes of capacity had a utilisation rate of 43 percent, South Korea's 101 million tonnes was used at 35 percent and China's 49 million tonnes at 56 percent.
While it's clear that the big buyers in North Asia can take more LNG, it's also obvious that Spain and Britain can take substantially more LNG.
They also have the means to use the natural gas, while demand in both Japan and South Korea has been largely steady in recent years, although China is witnessing strong growth.
Overall, when the rest of Australia's LNG hits the market, it will likely push more Qatari cargoes to Europe.
As the U.S. LNG comes on stream, it can choose whether to got to Europe or Asia depending on the price.
Europe will become the destination of last resort for an increasing number of spot LNG cargoes, meaning it gets to set the price that determines where the fuel goes.
Despite being a substantially smaller market than Asia, Europe will become the kingmaker in LNG.
By Clyde Russell