Page 9 - GLNG Week 28

GLNG COMMENTARY GLNG
LNG buyers increasingly seek flexibility as oil-indexation declines
Oil-linked LNG contracts are falling out of favour, while buyers are increasingly in a position to demand more exibility from sellers
PERFORMANCE
WHAT:
LNG buyers are increasingly likely to push for more exibility in the contracts they enter into.
WHY:
Oil-indexation is falling out of favour in an oversupplied market where competition is high.
WHAT NEXT:
Gas-on-gas competition is expected to intensify further.
ABUNDANT and varied sources of LNG are increasingly allowing buyers of the super-chilled fuel to push for more exibility in the contracts they enter into, as competition between sellers intensi es. Against this backdrop, oil-indexed contracts appear to be falling out of favour – despite still dominating the market for now. ese trends were already playing out before this year, and appear to be set to continue for now.
e International Gas Union’s (IGU) latest annual Wholesale Gas Price Survey, published earlier this month and looking at trends in 2019, noted the rise in gas-on-gas (GOG) competi- tion, as well as the decline of oil price escalation (OPE) price-formation mechanisms. e IGU found that oil-indexed LNG imports globally had fallen below 60% of the total for the rst time last year, with OPE accounting for 59% while GOG had risen to 41%, up from 25% in 2016.
is was attributed in part to the sharp rise of purchases on the LNG spot market, as well as an in ux of LNG into Europe, and marked the con- tinuation of a trend the IGU said had emerged over the past three years.
In the short term, IGU notes that the balance between OPE and GOG in LNG imports could depend on how many contracted cargoes are cancelled this year as the market struggles to balance rising supply with slumping demand. In
the longer term, however, the decline of oil-in- dexed prices appears set to continue as many existing long-term contracts expire in the com- ing years. Several current trends – including lower spot prices and the wider availability of di erent options – are encouraging some buyers to seek more exible terms associated with any new contracts.
Seeking exibility
is is already playing out in Asia, where LNG demand is expected to grow strongly in the coming years – the impact of the coronavi- rus (COVID-19) pandemic in the short term notwithstanding.
As spot prices fell to record lows this year, buyers on the spot market nd themselves at an advantage to o akers with long-term contracts, depending on the performance of prices their LNG is indexed to. Earlier this year in particular, when crude prices were higher but LNG spot prices were tumbling, buyers on the spot marker were able to bene t.
Under such circumstances it is perhaps not surprising that one possibility now being explored is that of buying longer-term volumes at spot prices. And while buyers are increas- ingly spoiled for choice, uncertainty over how demand will be a ected further by COVID-19 in the short term is also coming into play, and
Week 28 17•July•2020 w w w . N E W S B A S E . c o m P9