--- title: "Natural Gas and LNG" book: "Markets III: Commodities, Energy and Crypto" subject: quant language: en chapter: 4 exercises: 8 source: https://one-course.com/books/quant/3/en/chapter/4-natural-gas-and-lng --- # Chapter 4 — Natural Gas and LNG In early 2020 a megawatt-hour of gas for next-month delivery in the Netherlands cost well under 25 euros. Two and a half years later it traded above 300. In the same months a tanker could load gas in Louisiana at a price linked to the US benchmark, a few dollars per million British thermal units, sail for two weeks, and sell the cargo into Europe at many times that. Gas is a network commodity: it moves in pipelines, and where pipelines end, in ships that must first cool it to $-162{}^{\circ}\mathrm{C}$. Its prices are local, seasonal and, when the network breaks, extreme. This chapter covers the hubs where gas is priced, the basis between them, the seasonal cycle of storage, the arbitrage of liquefied cargoes, and the crisis of 2022. ## 4.1 Gas as a network commodity: hubs and units Gas is traded at hubs, points of a pipeline network at which title can pass between parties. Some hubs are physical places; in Europe most are notional. **Definition 4.1 (Virtual trading point, Henry Hub, Title Transfer Facility).** A *virtual trading point* is a notional point of a gas transmission system, operated by its network operator, at which gas that has entered the system can be traded without regard to where it physically is. *Henry Hub* is a physical interconnection of pipelines in Louisiana whose price is the US benchmark and the delivery point of the main US gas futures. The *Title Transfer Facility* (TTF) is the virtual trading point of the Dutch network and the most traded European gas benchmark. Units differ by region. The United States prices gas in dollars per million British thermal units (MMBtu); continental Europe in euros per megawatt-hour of energy; the United Kingdom in pence per therm ($0.1\,\mathrm{MMBtu}$). One MMBtu is $0.293\,071\,\mathrm{MWh}$: a TTF price of $40\,\mathrm{EUR}/\mathrm{MWh}$ at EURUSD 1.16 is $13.60\,\$/\mathrm{MMBtu}$. The US futures contract is 10 000 MMBtu delivered at [Henry Hub](#def-m3-natural-gas-and-lng-hubs); its trading ends three business days before the first day of the delivery month. **Definition 4.2 (Gas day).** The *gas day* is the 24-hour period over which a network balances flows and settles daily products. In the European Union it runs from 05:00 to 05:00 UTC in winter time and from 04:00 to 04:00 UTC in summer time. ## 4.2 Locational basis and pipelines A price at a hub is a price for gas there. Between two hubs the price difference is bounded by the cost of moving gas between them when capacity is free, and unbounded when it is not. **Definition 4.3 (Locational basis).** The *locational basis* of a hub is its price minus the price of a reference hub (in the United States, [Henry Hub](#def-m3-natural-gas-and-lng-hubs)) for the same delivery period. It is traded as basis swaps and futures. **Proposition 4.4 (Basis is bounded by transport only when capacity is available).** Let $c$ be the variable cost of moving gas from hub $A$ to hub $B$ and suppose a shipper holds unused capacity. Then $P_B - P_A \le c$: otherwise the shipper buys at $A$, ships and sells at $B$ for a riskless profit. Without unused capacity the difference can be any size, and its value accrues to the holders of capacity. **Proof.** With capacity, the trade $-P_A - c + P_B > 0$ is available to anyone holding it and is done until the prices move. Without capacity no trade links them. ∎ A producing region whose pipelines out are full can see its hub price fall far below the reference, sometimes below zero; a consuming region cut off from supply can see it rise far above. The value of pipeline capacity is the expected value of these spreads, which is why capacity is itself sold at auction. ## 4.3 Storage and seasonality Demand for gas peaks in winter (heating) and, in hot regions, in summer (power for air conditioning), while production is roughly flat. Storage bridges the two. **Definition 4.5 (Injection season, summer–winter spread).** The *injection season* is the part of the year in which storage is filled, roughly April to October in the northern hemisphere; gas is withdrawn in the winter months that follow. The *summer–winter spread* is the price of gas for the next winter minus the price for the preceding summer; it pays for storing gas through the season. ![The seasonal shape of a gas forward curve, schematic: summer months are cheap, winter months dear. A storage owner buys summer and sells winter; the spread, net of injection and withdrawal costs, is its intrinsic value. Stylised, no data.](https://one-course.com/images/onecourse/chapters/quant-3/m3-natural-gas-and-lng/fig-c7605bebc3d1.svg) ***Figure 4.1.** The seasonal shape of a gas forward curve, schematic: summer months are cheap, winter months dear. A storage owner buys summer and sells winter; the spread, net of injection and withdrawal costs, is its intrinsic value. Stylised, no data.* The simplest valuation of storage buys the cheapest summer months and sells the dearest winter ones forward, within the facility’s capacity and its injection and withdrawal rates; the rest of its value lies in re-optimising as prices move, which One Quant Book 6, chapter 16, values as options. **As of September 2026 — European storage rules.** Regulation (EU) 2022/1032 required member states’ storage to be 80% full by 1 November 2022 and 90% by 1 November of each later year. Regulation (EU) 2025/1733, published on 10 September 2025, extends the rules to the end of 2027 and lets the 90% target be met at any time between 1 October and 1 December, with deviations of up to 10 percentage points in difficult market conditions. ## 4.4 LNG: liquefaction, shipping and cargo arbitrage **Definition 4.6 (Liquefied natural gas).** *Liquefied natural gas* (LNG) is natural gas cooled to about $-162{}^{\circ}\mathrm{C}$, at which it is a liquid about six hundred times denser than the gas: it is shipped in insulated carriers, loses a small share to boil-off on the way, and is warmed back to gas (regasified) at the receiving terminal. LNG turns regional gas markets into a global one, but only at the margin, because the chain is expensive ([Figure 4.2](#fig-m3-natural-gas-and-lng-chain)). Its contracts come in two families. Long-term contracts to Asian buyers were long priced on oil. **Definition 4.7 (Oil indexation, destination flexibility).** *Oil indexation* prices gas by a formula $P = s \cdot P_{\mathrm{oil}} + k$, a slope $s$ times an average of past oil prices plus a constant. A contract has *destination flexibility* when the buyer may take the cargo to any destination rather than to a named terminal. The US export model is different: a buyer pays a fixed fee per MMBtu for the right to liquefaction capacity, whether or not it lifts cargoes, plus a variable price of 115% of [Henry Hub](#def-m3-natural-gas-and-lng-hubs) for each cargo it lifts, [free on board](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-incoterms) at the terminal; it may cancel a cargo with notice and still owes the fixed fee. Such a buyer holds a portfolio of options: each month it lifts the cargo if the best [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) covers the variable price, and sends it to the destination that pays the most. **Definition 4.8 (Japan Korea Marker).** The *Japan Korea Marker* (JKM) is a [price-reporting agency](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-pra)’s daily assessment of spot LNG cargoes delivered ex-ship into Japan, South Korea, China and Taiwan, the main Asian spot benchmark. ![The LNG chain of a US export cargo, with the cost each link adds. The netback is the destination price less the right-hand costs; the cargo is lifted if the netback covers the variable price at liquefaction. Schematic.](https://one-course.com/images/onecourse/chapters/quant-3/m3-natural-gas-and-lng/fig-267f89b3a12f.svg) ***Figure 4.2.** The LNG chain of a US export cargo, with the cost each link adds. The [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) is the destination price less the right-hand costs; the cargo is lifted if the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) covers the variable price at liquefaction. Schematic.* **Example 4.9 (Europe or Asia).** Take a cargo of 3.5 million MMBtu, a charter rate of $60 000 a day, boil-off of 0.1% a day, and one-way voyages of 14 days to north-west Europe and 25 to north Asia (illustrative, but close to the 14 days from Corpus Christi to Rotterdam and 28 to Hong Kong through Panama that the Oxford Institute for Energy Studies gives), with regasification at $0.50\,$ and $0.40\,\$/\mathrm{MMBtu}$. With [Henry Hub](#def-m3-natural-gas-and-lng-hubs) at $3.00\,$ the variable price is $3.45\,\$/\mathrm{MMBtu}$; shipping costs $0.54\,$ to Europe and $0.97\,\$/\mathrm{MMBtu}$ to Asia, so Asia must pay $0.33\,\$/\mathrm{MMBtu}$ more than Europe to win the cargo. At $12.00\,$ in Europe and $12.50\,$ in Asia the [netbacks](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) are $10.96\,$ and $11.13\,\$/\mathrm{MMBtu}$: Asia. ![Monthly averages of three gas benchmarks, January 2000 to July 2026, on a log scale. US gas decoupled from the rest of the world after 2009; Europe peaked at 69.98\,\$/ MMBtu in August 2022. Data: FRED series MHHNGSP (US Energy Information Administration), PNGASEUUSDM and PNGASJPUSDM (International Monetary Fund).](https://one-course.com/images/onecourse/chapters/quant-3/m3-natural-gas-and-lng/fig-8a47f9d8fe75.svg) ***Figure 4.3.** Monthly averages of three gas benchmarks, January 2000 to July 2026, on a log scale. US gas decoupled from the rest of the world after 2009; Europe peaked at $69.98\,\$/\mathrm{MMBtu}$ in August 2022. Data: FRED series MHHNGSP (US Energy Information Administration), PNGASEUUSDM and PNGASJPUSDM (International Monetary Fund).* Run month by month since the first US Gulf export cargoes of 2016, the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) rule of [Example 4.9](#ex-m3-natural-gas-and-lng-choice) sends the cargo to Asia in 93 of 125 months and says it should not be lifted in seven months of 2020 (February to August) and in February 2021, when a freeze in Texas sent [Henry Hub](#def-m3-natural-gas-and-lng-hubs) up ([Figure 4.4](#fig-m3-natural-gas-and-lng-netback)). Buyers did cancel cargoes in 2020: the US Energy Information Administration counted 45 cancelled for August and about 30 for September, as low spot prices in Europe and Asia made US exports uneconomic. ![A US Gulf cargo’s best netback against its variable price, monthly, March 2016 to July 2026. Where the netback falls below the dashed line the cargo is worth more cancelled. Illustrative shipping and regasification costs of ; prices as .](https://one-course.com/images/onecourse/chapters/quant-3/m3-natural-gas-and-lng/fig-94e9b16ea9a7.svg) ***Figure 4.4.** A US Gulf cargo’s best [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) against its variable price, monthly, March 2016 to July 2026. Where the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) falls below the dashed line the cargo is worth more cancelled. Illustrative shipping and regasification costs of [Example 4.9](#ex-m3-natural-gas-and-lng-choice); prices as [Figure 4.3](#fig-m3-natural-gas-and-lng-hubs).* **As of September 2026 — US exports.** US LNG exports rose 26% to 15.1 billion cubic feet a day in 2025, 26% of the world total; the United States is the largest LNG exporter, ahead of Qatar and Australia. ## 4.5 The crisis of 2022 Russia’s pipeline exports to the European Union and the United Kingdom fell by almost 40% in the first seven months of 2022 against 2021; Nord Stream 1 ran at 20% of its capacity in July and stopped entirely at the start of September (in November Sweden’s Security Service found that detonations on both Nord Stream pipelines had been gross sabotage); in October Russian pipeline deliveries were 80% below their level a year earlier. European hub prices rose above 300 euros a megawatt-hour, the front month peaking in August. Europe replaced the lost pipeline gas with LNG, outbidding Asia for flexible cargoes, and filled its storage under the new rules. Utilities that had sold their production forward on exchanges faced margin calls that ran to billions: the importer Uniper had drawn a EUR 9 billion state credit line in full by the end of August ([Chapter 28](https://one-course.com/books/quant/3/en/chapter/28-when-markets-break-together#ch-m3-when-markets-break-together)). **As of September 2026 — The market correction mechanism.** Council Regulation (EU) 2022/2578 set a dynamic bidding limit on front-month TTF derivatives: if the front-month settlement exceeded EUR 180/MWh and was EUR 35 above a global LNG reference price, orders more than EUR 35/MWh above that reference were not to be accepted. It applied from 1 February 2023 and, extended once, until 31 January 2025. ## 4.6 Tutorial: netbacks and the destination choice **Goal.** Compute a cargo’s [netbacks](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback), choose its destination and decide whether to lift it, month by month. **End state:** [Example 4.9](#ex-m3-natural-gas-and-lng-choice), [Figure 4.4](#fig-m3-natural-gas-and-lng-netback) and the count of months not lifted. 1. **Shipping, [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback), choice.** `def shipping_cost (route: Route, cargo_mmbtu: float , cargo_value: float ) -> float : """Cost per delivered MMBtu of the round trip: charter for twice the one-way days, plus the value of the gas boiled off on the laden leg.""" delivered = cargo_mmbtu * (1.0 - route.boiloff_per_day * route.days) charter = 2.0 * route.days * route.charter_per_day boiloff = cargo_mmbtu * route.boiloff_per_day * route.days * cargo_value return (charter + boiloff) / delivered def netback (dest_price: float , route: Route, cargo_mmbtu: float , fob_value: float ) -> float : """Value per MMBtu at the loading terminal of a cargo sold at the destination price.""" return dest_price - route.regas - shipping_cost(route, cargo_mmbtu, fob_value) def choose (dest_prices: dict [str , float ], routes: dict [str , Route], cargo_mmbtu: float , fob_value: float ) -> tuple [str , float ]: """The destination with the highest netback, and that netback.""" nb = {k: netback(dest_prices[k], routes[k], cargo_mmbtu, fob_value) for k in dest_prices} best = max (nb, key=lambda k: (nb[k], k)) return best, nb[best]` **Listing 4.1.** Shipping cost per delivered MMBtu, netback and the best destination. code/firm/lngarb/firm_lngarb.py 2. **Break-even and lift.** `def breakeven_spread (a: Route, b: Route, cargo_mmbtu: float , fob_value: float ) -> float : """Price of destination b minus price of destination a at which the netbacks are equal.""" return (shipping_cost(b, cargo_mmbtu, fob_value) + b.regas) - (shipping_cost(a, cargo_mmbtu, fob_value) + a.regas) def lift (best_netback: float , henry_hub: float , slope: float = 1.15 ) -> bool : """Lift the cargo only if the netback covers the variable (Henry Hub-linked) part of the price; the fixed fee is owed whether or not the cargo is lifted.""" return best_netback >= slope * henry_hub` **Listing 4.2.** The break-even spread between two destinations and the lift rule. code/firm/lngarb/firm_lngarb.py 3. **Run** `m3_lng.history()` , `summary()` and `fig_lng.py` . **What to change next.** Route Asian cargoes around the Cape of Good Hope when the Panama Canal is restricted, and count how many destination decisions change; make the charter rate move with the spread, as it does when many cargoes chase the same arbitrage. ## 4.7 Build: the cargo arbitrage engine **Purpose.** The miniature firm holds liquefaction capacity: every month it must decide whether to lift and where to send each cargo, and it quotes gas across hubs in three units. **Interface.** `eur_mwh_to_usd_mmbtu`, `usd_mmbtu_to_eur_mwh`; `fob_price(henry_hub, slope, fee)`; `Route(name, days, charter_per_day, boiloff_per_day, regas)`; `shipping_cost`; `netback`; `choose`; `breakeven_spread`; `lift`. **Rules.** The fixed fee is sunk and never enters the lift decision; boil-off is paid at the cargo’s FOB value and reduces the delivered volume; the charter is paid for the round trip; ties go to the alphabetically first destination. **Acceptance tests.** `code/firm/lngarb/tests/`: unit round trips; a longer route costs more; the choice flips at the break-even spread; the lift rule. **Stretch.** Canal constraints and their waiting times; a fleet of carriers scheduled across a year; the value of the lift option computed by Monte Carlo on correlated hub prices. Sources and further reading - Regulation (EU) 2022/1032 and Regulation (EU) 2025/1733 on gas storage; Council Regulation (EU) 2022/2578 (market correction mechanism); Commission Regulation (EU) 2015/703 (gas day). - US Energy Information Administration, *Today in Energy* : LNG exports 2020 and 2025; Russia’s pipeline exports to Europe (2022). IEA, *2022 Energy Crisis: Frequently Asked Questions* . - Cheniere Energy Partners, Form 10-K (SPA pricing at 115% of Henry Hub plus a fixed fee). - Swedish Security Service, “Confirmed sabotage of the Nord Stream gas pipelines”, 18 November 2022 (Internet Archive copy); Fortum, press release on Uniper’s KfW facility, 29 August 2022; Oxford Institute for Energy Studies, *LNG Shipping Chokepoints* , NG 188, February 2024; ACER, preliminary report on the market correction mechanism, 2023. - CME Group, Henry Hub natural gas futures overview; S&P Global Platts, JKM. - D. Dumitrescu et al., “European energy crisis, the Dutch TTF, and the market correction mechanism”, *Journal of World Energy Law & Business* , 2024. - FRED series MHHNGSP, PNGASEUUSDM, PNGASJPUSDM. ## 4.8 Exercises **Exercise 4.1 ★.** Convert $10\,\$/\mathrm{MMBtu}$ into EUR/MWh at EURUSD 1.16, and into pence per therm at GBPUSD 1.30. **Solution of Exercise 4.1.** $10/0.293071/1.16 = 29.42\,\mathrm{EUR}/\mathrm{MWh}$. A therm is 0.1 MMBtu, so $1 a therm, or $100/1.30 = 76.9$ pence per therm. **Exercise 4.2 ★.** Why is the [summer–winter spread](#def-m3-natural-gas-and-lng-season) positive in most years, and what bounds it? **Solution of Exercise 4.2.** Winter demand exceeds production and must be met from storage filled in summer, so winter gas must pay for storing summer gas. Arbitrage by storage owners bounds it from above by the cost of storage (injection, withdrawal, capacity and financing) when capacity is free; when storage is full or scarce it can exceed that cost. **Exercise 4.3 ★.** A US LNG buyer pays a fixed fee of $2.50\,\$/\mathrm{MMBtu}$ and 115% of [Henry Hub](#def-m3-natural-gas-and-lng-hubs). [Henry Hub](#def-m3-natural-gas-and-lng-hubs) is $2.00\,$ and its best [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) $2.10\,\$/\mathrm{MMBtu}$. Does it lift? What does it lose per MMBtu of capacity either way? **Solution of Exercise 4.3.** The variable price is $1.15 \times 2.00 = 2.30\,\$/\mathrm{MMBtu}$, above the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) of 2.10: it cancels. It loses the $2.50\,$ fee either way; lifting would lose a further $0.20\,\$/\mathrm{MMBtu}$. **Exercise 4.4 ★★.** With the routes of [Example 4.9](#ex-m3-natural-gas-and-lng-choice) and [Henry Hub](#def-m3-natural-gas-and-lng-hubs) at $3, Europe pays $11.00\,\$/\mathrm{MMBtu}$. Above what Asian price does the cargo go to Asia? **Solution of Exercise 4.4.** Above $11.00 + 0.33 = 11.33\,\$/\mathrm{MMBtu}$. **Exercise 4.5 ★★.** A hub’s pipelines out are full and it trades $2\,\$/\mathrm{MMBtu}$ below [Henry Hub](#def-m3-natural-gas-and-lng-hubs) while transport costs $0.30\,$. Who earns the difference, and what trade would you do if you held capacity? **Solution of Exercise 4.5.** The holders of pipeline capacity out of the hub: the spread above transport cost, $1.70\,\$/\mathrm{MMBtu}$, is the value of their capacity. With capacity, buy at the hub, ship, and sell at [Henry Hub](#def-m3-natural-gas-and-lng-hubs) (or sell the basis forward). **Exercise 4.6 ★★.** The voyage to Asia doubles to 50 days (a canal is closed). By how much does the break-even spread rise, with the other inputs of [Example 4.9](#ex-m3-natural-gas-and-lng-choice)? **Solution of Exercise 4.6.** The break-even spread rises from $0.33\,$ to $1.35\,\$/\mathrm{MMBtu}$, by $1.02\,$: the longer voyage costs more charter and more boil-off. **Exercise 4.7 ★★★.** *Coding.* With `history`, count the months since March 2016 in which the cargo goes to Asia and list those in which it is not lifted. **Solution of Exercise 4.7.** Asia in 93 of the 125 months from March 2016 to July 2026; not lifted in February to August 2020 and February 2021. **Exercise 4.8 ★★★.** *Find the flaw.* “European gas was ten times dearer than US gas in August 2022, so every US cargo earned ten times its cost.” **Solution of Exercise 4.8.** The cargo’s revenue is the destination price less shipping and regasification, and its cost is 115% of [Henry Hub](#def-m3-natural-gas-and-lng-hubs) plus the fixed fee paid for the capacity: the margin is the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) less both. Most of the spread was also earned by whoever held the cargo’s destination rights, often under long-term contracts signed years earlier, not by every seller; and freight rates rose with the spread. ## 4.9 Problem: Where Should the Cargo Go? **Problem 4.1.** Weekend problem — a flexible cargo between two continents A trading house holds a US Gulf cargo of 3.5 million MMBtu with full [destination flexibility](#def-m3-natural-gas-and-lng-contracts), bought at 115% of [Henry Hub](#def-m3-natural-gas-and-lng-hubs) plus a sunk fee. Use the routes and costs of [Example 4.9](#ex-m3-natural-gas-and-lng-choice). **Part I — The costs.** 1. With [Henry Hub](#def-m3-natural-gas-and-lng-hubs) at $3, give the variable price of the cargo. 2. Give the shipping cost per delivered MMBtu to Europe. 3. And to Asia. 4. What share of the cargo boils off on each voyage? 5. Why is the charter paid for twice the one-way days? **Part II — The decision.** 6. Give the break-even Asia-minus-Europe spread. 7. With Europe at $12.00 and Asia at $12.50, where does the cargo go? 8. What is the cargo’s margin over its variable price, in dollars? 9. What happens to the decision if the charter rate doubles? 10. In August 2022 ( [Henry Hub](#def-m3-natural-gas-and-lng-hubs) $8.81, Europe $69.98, Asia $54.16), where does it go? **Part III — The option.** 11. Why is the right to choose a destination worth money even when prices are equal on average? 12. In June 2020, what did the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) rule say, and why? 13. What does the sunk fee change in that decision? 14. Who gains when the buyer cancels a cargo? 15. What market moves when many flexible cargoes chase the same arbitrage? **Part IV — Judgement.** 16. Why did Europe win most flexible cargoes in 2022? 17. Why does a canal closure raise the price of gas in Asia relative to Europe? 18. Why might a buyer sign an oil-indexed contract rather than a Henry Hub-linked one? 19. State the *named result* : the spread at which the cargo is indifferent between the two destinations. 20. In one sentence: what links the world’s gas prices? **Solution of Problem 4.1.** **1.** $3.45\,\$/\mathrm{MMBtu}$. **2.** $0.54\,\$/\mathrm{MMBtu}$. **3.** $0.97\,\$/\mathrm{MMBtu}$. **4.** 1.4% to Europe, 2.5% to Asia. **5.** The ship must come back empty (in ballast) before it can load again. **6.** $0.33\,\$/\mathrm{MMBtu}$. **7.** Asia: [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) $11.13\,$ against $10.96\,$. **8.** $11.13 \times 3.4125$ million delivered MMBtu less $3.45 \times 3.5$ million: about USD 25.9 million. **9.** The break-even rises to $0.72\,$, above the $0.50\,$ spread: Europe. **10.** Europe: [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) $68.85\,$ against $52.62\,\$/\mathrm{MMBtu}$. **11.** Prices at the two destinations move apart at random; the right to pick the higher, net of the break-even, is an option on the spread, worth something whenever the spread is volatile. **12.** Not to lift: the best [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback), $0.72\,\$/\mathrm{MMBtu}$, was below the variable price of $1.87\,$. **13.** Nothing: the fee is owed whether or not the cargo is lifted, so it is not part of the marginal decision. **14.** The buyer (it saves the variable price minus the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback)); the liquefaction owner still receives the fee. **15.** Freight: charter rates rise, which narrows the arbitrage. **16.** Its hubs paid more than Asia after the loss of Russian pipeline gas, and the voyage from the US Gulf is shorter. **17.** Asian cargoes from the Atlantic must sail the longer route, which raises the break-even and so the premium Asia must pay. **18.** For price stability tied to its other costs, security of supply, or because oil-linked contracts were what the seller offered. **19.** *Named result:* Asia must pay $0.33\,\$/\mathrm{MMBtu}$ more than Europe ($1.35\,$ if the voyage takes 50 days). **20.** Flexible LNG cargoes, which move to the best [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) until the spreads fall to the cost of shipping. ## 4.10 Interview questions **Interview question 4.1 ★ trader.** What is the difference between [Henry Hub](#def-m3-natural-gas-and-lng-hubs) and TTF as hubs? **Solution of Interview question 4.1.** [Henry Hub](#def-m3-natural-gas-and-lng-hubs) is a physical interconnection of pipelines in Louisiana and the delivery point of the US futures; TTF is a [virtual trading point](#def-m3-natural-gas-and-lng-hubs) of the Dutch network where any gas in the system can change hands. Different units and currencies too. *What the interviewer is looking for: physical versus virtual hub, and the units.* **Interview question 4.2 ★ trader, researcher.** Why is gas seasonal and oil much less so? **Solution of Interview question 4.2.** Gas demand is dominated by heating and power, both seasonal, while production is flat and storage costly; oil demand is less seasonal and oil is cheap to store in tanks. *What the interviewer is looking for: seasonal demand against flat supply and storage cost.* **Interview question 4.3 ★★ researcher.** A US LNG offtake contract is a strip of options. On what, with what strike? **Solution of Interview question 4.3.** Each month, an option to buy gas at 115% of [Henry Hub](#def-m3-natural-gas-and-lng-hubs) and sell it at the best destination hub less shipping and regasification: a spread option (on the maximum of several spreads), with the fixed fee as its premium. *What the interviewer is looking for: spread option, variable price as strike, fee as premium.* **Interview question 4.4 ★★ trader, risk.** You are long gas at a hub and short [Henry Hub](#def-m3-natural-gas-and-lng-hubs). What can make you lose a lot in a day? **Solution of Interview question 4.4.** A basis blow-out: a pipeline outage or a local demand spike moves the local hub far from [Henry Hub](#def-m3-natural-gas-and-lng-hubs), beyond transport cost; weather events (a freeze) move both legs by different amounts; margin calls on the paper legs. *What the interviewer is looking for: basis and capacity, not the price level.* **Interview question 4.5 ★★ risk.** Why did European utilities that were fully hedged face a liquidity crisis in 2022? **Solution of Interview question 4.5.** They had sold their output forward on exchanges; when prices rose tenfold the short futures required variation margin in cash, while the physical gas that offset them would only be sold later. The hedge was economically sound but consumed liquidity they did not have. *What the interviewer is looking for: liquidity versus solvency, margin on exchange hedges.* **Interview question 4.6 ★★★ developer, trader.** Design the tool that tells an LNG desk every morning where each of its twenty cargoes should go. **Solution of Interview question 4.6.** Inputs: cargo positions and schedules, contractual constraints, forward curves per hub, freight curves and canal status. For each cargo, compute the [netback](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback) to each feasible destination and date, choose subject to terminal slots and ship availability (an assignment problem), and report the choice, the margin and its sensitivity to spreads. *What the interviewer is looking for: [netbacks](https://one-course.com/books/quant/3/en/chapter/1-physical-commodity-markets#def-m3-physical-commodity-markets-netback), constraints, an assignment optimisation.*