LNG Buyers Dreading 2040 Try to Renegotiate Amid Supply Glutby
Less than 15% of contracted volumes expiring in next 5 years
Some LNG buyers are tied to deals lasting through 2040
For LNG buyers, 2040 is beginning to feel even further away.
Just a few years ago, faced with limited supply and relentless demand growth, liquefied natural gas buyers were happy to lock in contracts that ran through nearly the middle of the century, often paying prices linked to the cost of oil. Now, as the market moves deeper into oversupply, being tied to a producer for the next two decades is shifting from a blessing to a curse.
Less than 15 percent of long-term LNG supply contracts will expire in the next five years, according to data compiled by Bloomberg. Meanwhile, new projects in Australia and the U.S. are saturating the world with LNG, depressing spot prices this year in Asia’s energy trading hub of Singapore even as oil has risen about 20 percent. That’s giving buyers the incentive to try to renegotiate their deals with suppliers, according to analysts at Citigroup Inc. and Energy Aspects Ltd.
“Serious tensions will be seen in the market when oil starts transitioning to higher levels, driving contracted gas prices upwards,” Trevor Sikorski, an analyst with Energy Aspects in London, said by e-mail. “At the same time, the LNG spot market should stay low -- and that wider gap between the two prices will mean a number of buyers unhappy with that spread and this will drive calls for renegotiation.”
Petronet LNG Ltd. in December renegotiated its deal with Qatar’s RasGas Co., resulting in a drop by more than half of the price the Indian importer was paying. China National Petroleum Corp. wants new prices in its deal with Qatar, Chairman Wang Yilin said in March. Cnooc Ltd. Vice President Li Hui said last month the company is negotiating within its existing contract with Royal Dutch Shell Plc’s BG Group unit for 8.6 million tons of LNG a year.
Petronet’s negotiations allowed it to drop the price it’s paying for LNG to less than $5 per million British thermal unit, Oil Minister Dharmendra Pradhan said last week. The price was about $13 last year. In return, Petronet agreed to increase it’s purchases from Qatar.
“For India, achieving a low LNG import price at less than $5 per million Btu, based on prevailing oil prices through contract renegotiation, should embolden other parties to press for similar or even better terms,” Citigroup analysts including Ed Morse said in a research note Thursday. “Indeed, Asian buyers appear to be waiting for LNG sellers to acquiesce amid the looming oversupply.”
Breaking the Oil Link
Spot LNG in Singapore was assessed at $4.443 per million British thermal units May 3, down 33 percent this year, according to Singapore Exchange Ltd. Brent crude was at $44.93 a barrel at 10:16 a.m. London time.
About two-thirds of 160 long-term contracts with known commercial terms are linked to oil prices, according to data compiled by Bloomberg. That includes deals signed in 2009 in which Osaka Gas Co. Ltd and Chubu Electric Power Co. Inc. agreed to pay Chevron Corp. for LNG from the Gorgon project in northwest Australia based on Japanese crude import costs through 2040.
Buyers will try to change the basis of their deals from an oil-based index to a natural gas index such as Henry Hub in the U.S. to protect against an expected divergence in oil and gas prices, Sikorski said. The crash in energy prices has made other hedging options more affordable, said Melissa Stark, energy managing director and global LNG lead at Accenture. Importers can invest in midstream assets, like shipping and storage, or even buy stakes in U.S. shale projects and fields.
“There are more options for buyers,” Stark said by e-mail. “But with these options come more complexity, the need for trading and risk management capability.”
As some long-term contracts end, buyers will be looking to enter deals that are shorter in duration and smaller in volume, Gautam Sudhakar, IHS Inc.’s director of global LNG, said by e-mail. Projects that supply LNG for these expiring contracts are typically older and have paid off debts, so they will be able to add supply at competitive prices to the spot and short-term markets, he said.