Applying an Old Concept to Maximize LNG Market Profits: The Weighted Average Sales Price (WASP)

For years, the weighted average sales price (WASP) concept has been used to fairly allocate netback pricing to royalty interest owners in the natural gas industry. In this article, we will explore how natural gas producers can leverage this same concept to enhance their profits in the LNG market.

U.S. natural gas producers aiming to maximize their profit potential are increasingly looking to tie some of their production to various regional LNG indices. However, the challenge lies in choosing the right index: TTF or JKM? Historical examples show the difficulty of this decision—opting for TTF in 2010 meant missing the JKM price surge post-Fukushima, while choosing JKM in 2021 meant missing the TTF surge following Ukraine conflict. Is there a better approach?

Large fossil fuel corporations have spent years developing extensive global LNG portfolios. These portfolios encompass multiple natural gas sources across various countries, substantial LNG export and import terminal capacities, and dedicated shipping fleets. These corporations employ teams of experts in trading, marketing, logistics, and optimization to manage this complex flow. This diversification helps mitigate, but not eliminate, risks such as weather events, sub-optimal shipping routes (e.g., Panama and Suez Canal issues), geopolitical volatility, and other force majeure events.

As these large-scale LNG players exert more control over global flow, LNG prices are trending downward due to shipping optimizations. This trend offers a significant opportunity for U.S. natural gas producers to improve their bottom line. Instead of choosing a regional index, producers could request the weighted average sales price (WASP) from a global LNG portfolio player, minus a fee (covering marketing costs and a reasonable margin). This approach allows producers to benefit from the diversification implicit in a global portfolio without incurring the costs of building and maintaining such an operation themselves.

Benefits for Producers:

• Alignment of Interests: Producers’ interests align with those of global LNG portfolio players.

• Risk Mitigation: Avoids the risk of selecting the “wrong” index over time.

• Capacity Avoidance: Sidesteps downstream “discounts” related to import terminal capacity.

• Political Risk Reduction: Reduces but does not eliminate political risk.

• Market Risk Diversification: Mitigates short-term single downstream market risk.

• Investor Appeal: Provides investors exposure to the global LNG “pooled” price, which should be higher than a single index over time.

  
  

In our second article, we will talk about why a Global LNG portfolio player would want to offer this pricing concept to producers.