Asian LNG buyers see record-low contract prices
Asian buyers are negotiating some of the world’s cheapest long-term LNG contracts to date amid a supply glut that has depressed spot prices below half the cost of legacy contracts.
The world’s largest LNG buyer – the Korea Gas Corporation (Kogas) – has received bids in a recent tender equivalent to around USD 7/MMbtu at present oil prices, according to industry insiders.
That compares to prices of around USD 11/MMbtu under the terms of contracts signed in the wake of the Fukushima nuclear disaster of 2011 when Japanese utilities were urgently searching for gas supplies.
The turnaround has occurred as an expansion in global supplies – particularly from projects in the US and Australia – has outpaced disappointing Asian demand growth, sending spot prices tumbling to less than USD 4.5/MMbtu.
“What the spot is doing, is it’s influencing the contract market – contracts today are 30% below where they were during the boom years,” said Saul Kavonic, Credit Suisse head of oil and gas research in Australia.
Asian long-term LNG supply deals are typically linked to oil. To protect counterparties from sharp swings in Brent crude prices, the contracts are indexed under an ‘s-curve’.
Buyers and sellers haggle over the ‘slope’ of this curve, which determines how quickly a change in oil prices feeds through to LNG prices.
Contracts from earlier this decade when the LNG market was tighter featured slopes close to 15% of oil prices. Montel understands Kogas secured a slope closer to 11%.
Winners and losers
Despite the present supply imbalance, most analysts still expect a tight LNG market to emerge next decade owing to rising gas demand and a lack of recent investment in new projects.
A backlog of potential projects looking to cash in on that anticipated shortage means many observers expect gas companies to pull the trigger on a record number of final investment decisions this year.
Yet prices are coming under pressure just as producers hunt for the supply deals to justify investments that are intended to ramp up in the 2020s.
“The new long-term contract prices being agreed have not inhibited new supply projects to get [a final investment decision], but obviously lower prices mean that some of the less cost competitive projects will not be able to proceed,” said Thanasis Kofinakos, head of gas and LNG consulting at Wood Mackenzie, an energy consultancy.
Law firm DLA Piper estimates US projects account for around half the 231m tonnes per annum of potential final investment decisions that could be made this year.
Prevailing prices, an economic slowdown and trade tensions with China – the world’s second biggest LNG importer – all suggested competing projects in Russia, Qatar and Sub-Saharan Africa would prove more competitive, said Henning Gloystein, global energy director at the Eurasia Group.
“A lot of big LNG investment will be reviewed, put on hold or even cancelled. At biggest risk are US projects.”
And buyers are not just using the weak spot market to prise cheaper future deals out of LNG producers – they are also trying to renegotiate existing contracts.
WoodMac put the total volume of Asian contracts presently under price review at 15-25%.
This has been particularly onerous for Australian suppliers, with as many as half the country’s long-term deals under review at present, according to Kavonic.
Japan’s Osaka gas has even taken the ExxonMobil-led PNG LNG venture in Papua New Guinea to arbitration, the first time a Japanese buyer is thought to have acted so aggressively to cut costs, Interfax reported this summer.
Contracts covered two thirds of the world’s LNG trade in 2018, according to the International Group of Liquified Natural Gas Importers, with Asia home to three quarters of global LNG demand.
The average length of long-term supply contracts doubled to 13 years last year, according to Shell.