Economists and business leaders around the world grimaced as oil prices recently collapsed below $20 (€18.36), the lowest level since 2002. At the time that happened, most of the world's economies were already in lockdown. Planes were grounded, highways and streets were empty; the world had ground to a near economic halt.

Furthermore, the current COVID-19 pandemic also exposed weakness of the supply chains and overdependence on the single source of any material or energy.

The first fall in oil prices came in January when China put Wuhan under quarantine, subduing demand. The badly timed price war between Russia and Saudi Arabia exacerbated the situation. Although some recovery in prices has been seen, it remains spotty and relatively unstable. Most economists seem to agree that depressed pricing in energy markets could be with us for some time.

Obviously, importing countries can immediately benefit from this low pricing. One of the more obvious and attractive fuels throughout the price curve, is natural gas. After all, natural gas is presently the cleanest, most efficient and consistently reliable fossil fuel for electricity generation available in today's market and has immediately started replacing coal with the fall in prices.

While, numerous countries are wisely taking a closer look at the many benefits of natural gas, not all have access to it. Moreover, in many geographies, like islands, the most common method of delivery of natural gas — by pipeline — is not suitable due to prohibitive costs or compromises in reliability due to political realities.

The LNG alternative  

As such, liquefied natural gas (LNG) provides a highly attractive answer to the political and geographic realities faced by these areas.  Additionally, the affordable cost associated with LNG infrastructure, such as storage and regasification facilities, helps add to the real-world appeal of this fuel.  

With the current reduction in its cost, utilizing LNG for multiple applications becomes an even wiser energy play. The examples of Poland and Lithuania come immediately to mind, where the existence of LNG facilities has delivered security and stability previously constricted by dependence on alternate providers.

One can only imagine how differently the drama around Nord Stream 2 and the Gazprom-Ukraine supply conflict could have played out had Ukraine been able to receive seaborne LNG shipments — something which currently looks far-fetched given navigational restrictions of the Bosporus. 

Read more:  Liquefied natural gas: US hype and German obedience?

But it's not only security. Economically, LNG projects can bring long term financial benefits to the country, especially in today's age of record low prices. A combination of LNG and efficient gas-fired generation is typically cheaper than oil and less efficient units. In Europe, the difference is amplified due to the savings on emissions.

Europe weigh options

The Mediterranean is the next frontier for LNG.  Although adoption there has been relatively slow, strong demand and appealing market signals for the development to continue. Spain, Italy and Greece are active players in global LNG markets and remain eager for their neighbors to follow.  

The European Commission has evidenced its support by providing a €101.4 million ($110.2 million) grant along with the financing by the Croatian government for the Krk LNG terminal in 2019. Even without a prospect for private funding, Croatia enacted legislation to facilitate the permitting of the terminal, and the approval from the EU antitrust regulators followed thereafter. 

The case for LNG is further bolstered by the energy reliability needs for the islands of Crete, Cyprus, Corsica, and Malta. Crete, for example, would benefit greatly by the Greek government's support for relevant projects on the island. The sooner regulators back LNG, the sooner Crete can recognize its potential to become a hub and a model for LNG's full-scale benefits. 

The island stands well-positioned to play an integral role in helping in the transition of some of Greece's 6,000 islands from highly polluting heavy fuel oil and expensive diesel, to cleaner, more efficient, and more reliable gas.

Further to the East, Cyprus is moving ahead with a short-term LNG importation terminal to solve its current energy needs, while still developing offshore finds that someday may see that terminal used for export. In December 2019, after several false starts and cancellations, the state-owned ETIFA signed a landmark €290 million deal for an LNG import terminal with a consortium led by China Petroleum Pipeline Engineering. 

Corsica is already experimenting with LNG for small-scale generation for berthed vessels, but the island still has a long way to go in terms of realizing LNG's full potential. Just recently, however, the Ministry of Ecology of France announced the long-awaited tender for LNG-to-Power project for France's largest island.   

Special recognition should go to the Maltese government's decisiveness to approve an LNG-to-Power project in 2013.  This decision resulted in Malta completely ridding itself of polluting fuel oil dependency, and it is now a leader in the adoption of clean new energy in the Mediterranean. 

Electricity became more affordable and widely available and after the expiration of the government's mandatory five-year fixed price period in 2021, prices for the residents of Malta are expected to fall further.  

Safe energy source

On energy security, the importance of the Maltese project is also evident. In December 2019, as a result of an accident, an undersea cable connecting the Maltese national grid to the European energy network was completely out of service. Disastrous consequences and a total blackout would have ensued had LNG facilities not been available to fuel the only two power plants remaining to supply power for the country.

Despite the fact that the cable was funded by the European Union, there were still parts of the day when LNG-based electricity was cheaper than the power imported by that cable. Once Malta moves into the floating LNG prices after 2021, this balance should shift towards LNG even further, questioning the rationale of EU's plans to also fund the Malta-Sicily gas pipeline.

Although developing LNG facilities has been repeatedly demonstrated as a sound and rational policy for enhancing energy reliability and environmental prudence, there remain pricing issues that must be addressed. While Malta did win on the immediate impact of the project on the economy and environment, did it get the pricing right?

The government was requiring Brent-based LNG formula and even went further by fixing the price. It worked in the beginning, but the current LNG spot prices are significantly lower. Many long-term buyers like Japan, India and China have all made similar miscalculations.

LNG has one of the most complex pricing mechanisms amongst the world's traded commodities. Origin, destination, tenor, and other contract terms complicate rational and stable pricing.

So what are the alternatives to Brent formula? Should LNG be pegged instead to the price of natural gas, e.g. using the Henry Hub or the TTF indexes? 

They are certainly not perfect as lack of mobility of the molecules still presents a big price variance by region. To ensure the availability of LNG, governments should continue to permit and grow facilities around the world, while rationalizing a pricing system that can benefit and incentivize all in the supply chain. If the industry gets this right, the future will be bright for LNG, but even brighter for the world.

Bud Albright is the former undersecretary of the US Department of Energy. In that role, as the third most senior official at DOE, he provided leadership for energy and environment programs, including energy research and development; demonstration and deployment; environmental cleanup; legacy management and radioactive waste management. Albright was appointed by former President Bush and was unanimously confirmed by the US. Senate. Prior to joining the Department, Albright served as Staff Director for the US House of Representatives Committee on Energy and Commerce. In that role he worked to address issues facing the country's telecommunications, energy, environmental, and health industries.