China Joins India Seeking Better LNG Contracts for Buyers

  • China's CNPC is among customers with greater bargaining power
  • Asian companies will be buoyed by Petronet success, IHS says

China’s biggest energy company joined India in seeking to renegotiate long-term liquefied natural gas supply contracts amid a global glut that’s driving spot prices to the lowest in more than five years.

China National Petroleum Corp. is looking for opportunities to rework the pricing method on its LNG supply contract with Qatar, Chairman Wang Yilin said in Beijing Wednesday. That follows a successful renegotiation by Petronet LNG Ltd. in December with Qatar’s RasGas Co., resulting in a drop by almost half of the prices the Indian importer was paying.

A global oversupply from the U.S. to Australia has strengthened the negotiating power of buyers. Long-term LNG contacts have probably never been this vulnerable as plunging spot prices encourage buyers to seek revisions, according to Jeff Brown, Singapore-based president of consulting firm FGE.

“The pressure is building for long-term LNG contracts” as buyers seek lower prices, James Taverner, a Tokyo-based analyst at IHS Inc. said in an e-mail. “Buyers serving markets with the strongest long-term prospects for LNG growth, such as India and China, will likely be in the strongest position in contract discussions.”

And there may be greater pressure to come as buyers seek to join forces. Japan’s Jera Co. said last month it’s in talks with Chinese and South Korean companies to form an alliance.

Extracting Concessions

“We believe that certain countries could be well-placed to exact similar concessions from Qatar on existing contracts,” Peter Lee, an analyst with BMI Research, said in an e-mail. “Just as India has been able to capitalize on its position as a large and growing off-taker of Qatari LNG, Japan and South Korea remain significant buyers with comparable market share.”

Long-term LNG supply contracts are typically linked to the value of crude oil and often include pricing reviews at specified times or if market conditions change. Reviews may involve extensive research and sometimes go to arbitration, Malcolm Johnson, a faculty member of The Oxford Princeton Programme, said in an e-mail.

CNPC’s Wang didn’t specify if the company’s contract with Qatar Liquefied Gas Co. has any pricing review clauses. Qatar Gas declined to comment.

Asian spot LNG prices in January fell below $5 per million British thermal units for the first time in data going back to 2010 and was at $4.20 as of March 7, according to New York-based Energy Intelligence.

More Volume

“We easily could see spot prices tracking $3, $4, $5 below long-term, oil-linked contract prices,” said FGE’s Brown. “In that environment you are always going to see some buyers looking for ways to minimize volumes or alter terms.”

The Petronet agreement may add more pressure from buyers on the pricing terms of new contracts in Asia, according to a Credit Suisse Group AG report last month.

The new Petronet deal reset its pricing formula to use a three-month oil price average instead of the previous formula using a five-year average, according to Credit Suisse. In return, the Indian importer agreed to increase its purchases from RasGas by an additional 1 million tons per year.

“Producers should be concerned but they should also expect this to continue,” Jonathan Stern, chairman and founder of the Oxford Institute for Energy Studies, said by e-mail. “Asia is going to work its way towards market prices and adjusting to a recent average of spot oil prices is just the start.”