Gas Price Scenario Analysis
Executive Summary
Key Takeaways
- ✓ Natural gas trades at materially different prices across regional hubs, unlike crude oil's more globally arbitraged pricing, so gas price scenarios should reflect the specific hub or market relevant to the asset being modelled.
- ✓ Long-term gas and LNG contracts are frequently priced against a specific indexation formula, historically oil-linked, increasingly Henry Hub or hybrid-linked, and a gas price scenario should be built around the actual indexation formula in the relevant contract.
- ✓ Applying a single global benchmark price to gas revenue, in the way oil is sometimes modelled, misstates exposure, since gas price movements in one region do not necessarily transmit to another region's price.
- ✓ Where an asset sells into multiple markets or under multiple contract types, each with its own indexation basis, the model should represent each price stream separately rather than blending them into a single average gas price.
Objective¶
This guide sets out how natural gas price scenarios are constructed for financial modelling, within Oil & Gas Financial Modelling.
Regional Hub Variation¶
Unlike crude oil, which is priced more consistently across global markets through arbitrage, natural gas trades at materially different prices across regional hubs, driven by local supply, demand, and transport infrastructure constraints. A gas price scenario should therefore reflect the specific hub or market relevant to the asset being modelled, rather than a single assumed global gas price.
Contract Indexation in Long-Term and LNG Agreements¶
Long-term gas and LNG sale agreements are frequently priced against a specific indexation formula rather than a spot market reference, historically linked to a crude oil marker, increasingly linked to Henry Hub prices or a hybrid formula, addressed further in LNG Financial Models. A gas price scenario for such a contract should be built around its actual indexation formula, since the contract's realized price does not move directly with a generic spot gas benchmark.
Modelling Multiple Price Streams Separately¶
Where an asset sells into multiple markets or under multiple contract types, each carrying its own indexation basis, the model should represent each price stream separately rather than blending them into a single average gas price, consistent with the netback-based approach addressed in Netback Price. Blending obscures how differently each market or contract actually responds to an underlying price movement, weakening the scenario analysis's usefulness.
Common Structuring Pitfalls¶
- Applying a single global benchmark gas price rather than the specific regional hub price relevant to the asset.
- Modelling a long-term contract's realized price as though it tracked spot gas prices directly, rather than its actual indexation formula.
- Blending multiple price streams into a single average, obscuring each market or contract's distinct price response.
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Related Pillars¶
Related Technical Guides¶
Related Glossary¶
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Frequently Asked Questions
Why is gas price scenario analysis different from oil price scenario analysis?
Because natural gas trades at materially different prices across regional hubs, unlike crude oil's more globally arbitraged pricing, and long-term gas and LNG contracts are frequently priced against a specific indexation formula rather than a single global benchmark.
What indexation formulas are common in long-term gas and LNG contracts?
Historically, pricing linked to a crude oil marker such as Japan Crude Cocktail, and increasingly pricing linked to Henry Hub gas prices or a hybrid formula combining elements of both, addressed further in LNG Financial Models.
What happens if a single global benchmark price is applied to gas revenue?
It misstates the asset's actual exposure, since gas price movements in one regional market do not necessarily transmit to another region's price the way crude oil price movements tend to transmit globally, and a single benchmark obscures this regional and contractual variation.
How should a gas asset selling into multiple markets be modelled?
With each price stream represented separately according to its own specific indexation basis, rather than blended into a single average gas price that would obscure how differently each market or contract actually responds to underlying price movements.
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