The race to secure long-term LNG contracts
Global LNG inventories may be at a record high amid weak demand but serious buyers are looking forward and sealing long-term supply deals to secure enough LNG for the future without exposing themselves to the fickle spot market.
While Europeans may not be huge fans of long-term deals because of their transition plans, Asians definitely like their long-term LNG deals. And so do the supermajors that will then sell this LNG to long-term-averse Europeans.
Since the start of the year, long-term deals worth some 13 million tons annually have been closed, according to Wood Mackenzie, with momentum from last year carrying over to this year. Last year, the research firm said, some 81 million tons annually of LNG were contracted under long-term supply deals.
Among the deals inked this year was China’s 20-year contract with Venture Global, which would supply 2 tons of LNG annually to China Gas Holdings beginning in 2027. The Chinese company also has a 25-year deal with Energy Transfer for the delivery of 700,000 tons of LNG annually.
Besides China, India is another big LNG buyer with a taste for long-term supply security. Bloomberg reported this week that energy importers on the subcontinent were on the hunt for long-term deals to reduce exposure to price fluctuations and were in talks with producers from the Middle East.
The rush comes after last year’s surge in spot market LNG prices after the European Union rushed to secure as much of the fuel as it could, pushing international prices so high some countries were forced to switch from gas to coal for energy generation because they couldn’t afford the gas in liquefied form.
“The lesson learned by the consumers is that they can’t run the business based on spot,” Akshay Kumar Singh, chief executive of Petronet LNG, said earlier this month, as quoted by Bloomberg. “Going forward, we will be finding a lot of long-term contracts signed by different stakeholders.”
Japan is also a big buyer of LNG. The energy-poor country is almost entirely dependent on imports for its energy consumption, and LNG is a big part of the import mix. Because of that, Japan is the world’s largest LNG importer, retaking the top spot from China last year even though total LNG imports declined slightly.
Qatar is a popular destination for LNG buyers, and so is Oman, according to Wood Mackenzie. The latter has seen a number of long-term deals sealed in the past few months, with buyers including Japanese utilities, the supermajors, a Chinese company, and a Turkish one.
As a result of this renewed interest, the research firm noted, prices are on the rise. Long-term LNG contracts are normally indexed to Brent crude prices, and in 2020 and 2021, the average pricing was some 10% of the benchmark per 1 million British thermal units. Now, sellers are asking for 12.5% of Brent and above, with some deals reaching 17%, Wood Mackenzie reports.
With oil prices being where they are right now, appetite for long-term LNG deals will probably intensify further as sellers might want to lock in lower oil prices amid forecasts for price rises later in the year.
The more LNG is locked in long-term contracts, however, the less LNG there is on the spot market, which suggests prices may see another surge at some point as contracts expiring in three to four years are currently being replaced with new ones.
Asian importers who are serious about their energy security seem to dominate the long-term supply market, which leaves Europeans, who are serious about their transition to wind and solar, to pay higher prices for the gas they would continue needing in the meantime.
