Liquefied natural gas buyers (LNG) are prioritising long-term contracts with diversity in price benchmarks, say industry executives, though some European buyers will seek flexible contracts of shorter duration as they ramp up decarbonisation.
Global gas prices leapt to all-time highs last year after Russia cut supplies to Europe, exposing buyers to soaring prices in the spot market.
Asian spot prices hit historic highs in August last year, at more than $70 per million British thermal units (mmBtu).
“At the end of the day, the value of the long-term contracts became a lot more apparent… When you saw the crisis happening in Europe, there was a lot of discussion about long-term contracts in Europe, and then Asia went out and signed contracts quickly,” said Andrew Barry, vice president of global LNG marketing at ExxonMobil.
“Definitely what we are seeing is more demand… (and) an appreciation for long-term contracts.”
Thailand, which is heavily reliant on importing spot LNG, aims to increase supplies via long-term contracts, said M.L. Peekthong Thongyai, senior vice president of the gas business unit of state-owned PTT
In January, Thailand signed a nine-year contract with Oman LNG for 800,000 tons a year, and is in talks with Qatar for a 1-million or 2-million -ton, 15-year supply deal.
Thailand now gets half its LNG supplies from term contracts and half from the spot market, Peekthong said.
“We want to change that to a more traditional (ratio) for an importing country like us. Maybe a 80:20 mix or 70:30,” he said, adding that Thailand diversifies LNG supply by purchasing from different parts of the world with different price indexations.
“We buy from the United States (priced) on the Henry Hub link, (if) we buy from the Middle East, maybe it’s Brent-linked,” he said.
“We want to basically have a different mix of locations as well as price formulations,” he said.
Thailand also has a mix of JKM-linked supplies as well as buying cargoes from the spot market, he added.
The JKM, or the Japan-Korea-Marker, is the LNG benchmark price assessment for spot physical cargoes in Asia.
MIXED PRICE INDEX
As Asian LNG prices have eased this year to last trade at $13/mmBtu on sluggish demand and high inventories, buyers from China and Japan, as well as Bangladesh and Thailand, locked in a flurry of long-term deals from suppliers in Qatar and the U.S.
Since March 2022, 107 million tons of long-term deals have been done, Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights, estimated.
“Who is doing the selling? Seventy percent of those contracts are out of the United States,” he said.
“Who’s buying? Fifty percent is not contracted to a specific market… It’s contracted to portfolio players and aggregate players. We’ll see where that supply goes.”
Some European buyers, however, will seek more flexible contract terms as the bloc cuts back on gas use to reach decarbonsation goals.
“If indeed LNG supply peaks in Europe in 2035, then it’s very challenging for us to sign 25-year contracts that go beyond 2040,” said Michael Lewis, chief executive of German utility Uniper.
A middle-ground contract duration would be between 10 years and 15 years, he said, a timeframe that is “congruent with LNG demand peaking in 2035”.
“Supply and demand have to move into balance, not only in terms of duration, but also indexation, so customers and suppliers can manage their risk. That implies more flexibility going forward.”
LNG buyers will also continue to seek mixed exposure to different price indexations for the contracts they secure.
“We’re not seeing a massive trend in one direction,” said ExxonMobil’s Barry, adding that customers seek a combination of oil and contracts linked to U.S. Henry Hub, Dutch TTF and JKM.
“We see that mix of hybrids as well… There is a trend that LNG term contracting on an oil index basis in Asia Pacific is still very strong.”
(Reporting by Emily Chow and Florence Tan; Editing by Clarence Fernandez)