Page 4 - AsianOil Week 29 2020

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LNG buyers increasingly

seek contract flexibility

COMMENTARY ABUNDANT and varied sources of LNG are
increasingly allowing buyers of the super-chilled
fuel to push for more flexibility in the contracts
WHAT: they enter into, as competition between sellers
LNG buyers are intensifies. Against this backdrop, oil-indexed
increasingly likely to contracts appear to be falling out of favour –
push for more flexibility despite still dominating the market for now.
in the contracts they These trends were already playing out before this
enter into. year, and appear to be set to continue for now.
The International Gas Union’s (IGU) latest
WHY: annual Wholesale Gas Price Survey, published
Oil-indexation is falling earlier this month and looking at trends in 2019, short term is also coming into play, and poten-
out of favour in an noted the rise in gas-on-gas (GOG) competition, tially making them more hesitant to commit to
oversupplied market as well as the decline of oil price escalation (OPE) new contracts.
where competition is price-formation mechanisms. The IGU found Among those calling for more flexible terms
high. that oil-indexed LNG imports globally had fallen for buyers is Japan’s JERA – the country’s largest
below 60% of the total for the first time last year, buyer of LNG.
WHAT NEXT: with OPE accounting for 59% while GOG had “Long-term SPAs [sales and purchase agree-
Gas-on-gas competition risen to 41%, up from 25% in 2016. ments] with rigid terms are no longer suitable for
is expected to intensify This was attributed in part to the sharp rise of a rapidly changing market,” a JERA senior execu-
further. purchases on the LNG spot market, as well as an tive officer, Hitoshi Nishizawa, said at the CWC
influx of LNG into Europe, and marked the con- Japan LNG virtual summit last week. He went on
tinuation of a trend the IGU said had emerged to call for more consideration around flexibility,
over the past three years. tradeability and price creativity as new contracts
In the short term, IGU notes that the balance are negotiated.
between OPE and GOG in LNG imports could
depend on how many contracted cargoes are What next
cancelled this year as the market struggles to bal- Indeed, some buyers may be closing in on supply
ance rising supply with slumping demand. In the deals with more favourable terms. In late June,
longer term, however, the decline of oil-indexed India’s Petronet LNG said it was close to final-
prices appears set to continue as many existing ising a 1mn tonne per year (tpy) supply deal at
long-term contracts expire in the coming years. a price near spot rates. No further details have
Several current trends – including lower spot been provided as yet, though the company has
prices and the wider availability of different been reported to be seeking supplies of LNG for
options – are encouraging some buyers to seek a 10-year period starting in 2024, and is said to
more flexible terms associated with any new have received 13 offers.
contracts. This comes after a memorandum of under-
standing (MoU) between Petronet and US-based
Seeking flexibility Tellurian expired in June, throwing the latter’s
This is already playing out in Asia, where LNG proposed Driftwood LNG export project in
demand is forecast to grow strongly in the Louisiana into doubt. Petronet also pushed to
coming years – the impact of the coronavi- renegotiate the price of LNG it buys from Qatar
rus (COVID-19) pandemic in the short term earlier this year. Initially, these efforts had been
notwithstanding. rebuffed by Qatar, but this was before COVID-
As spot prices fell to record lows this year, 19 hit the LNG market.
buyers on the spot market find themselves at an In late May, Qatar reversed its position,
advantage to offtakers with long-term contracts, saying it was ready to enter into discussions to
depending on the performance of prices their potentially renegotiate the price associated with
LNG is indexed to. Earlier this year in particu- its supply agreement with India.
lar, when crude prices were higher but LNG spot While nothing has yet been finalised, the pro-
prices were tumbling, buyers on the spot marker gress made by Petronet illustrates how current
were able to benefit. market conditions are favouring buyers. A suc-
Under such circumstances it is perhaps cessful price renegotiation – or new deal – could
not surprising that one possibility now being encourage other buyers to fight harder to obtain
explored is that of buying longer-term volumes more favourable terms. And given the levels of
at spot prices. And while buyers are increasingly competition in the market currently, other sell-
spoiled for choice, uncertainty over how demand ers may also be more willing than before to offer
will be affected further by COVID-19 in the greater flexibility.™

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