Global liquefied natural gas (LNG) buyers, hammered by high spot prices in Asia, are increasingly looking to short-term “bridge” contracts to ensure ample supply until demand is expected to cool down later this decade, according to an analysis by Wood Mackenzie.
Asian spot prices are hovering around $12/MMBtu for June and July delivery as demand grows and supply is scarce. However, buyers looking for supply post-2025 are spoiled for choice as new export facilities are expected to come online, the consultancy said. Currently there is more LNG available for sale via long-term contracts than there are buyers.
“Will this buyers’ market for long-term LNG continue? At the moment it seems so. We expect contract prices for shorter term deals of less than five years to rise,” said Wood Mackenzie’s Giles Farrer, director of global LNG.
“But if a buyer commits to a long-term deal, lower prices are possible – even if that deal is starting next year. Many sellers are offering contracts which ‘bridge’ the short and long-term market, giving buyers a potentially lower price over the next five years in exchange for the seller receiving long-term demand security. This allows the seller to de-risk project investments they have already committed to.”
The long-term LNG volume surplus exists largely because uncontracted supply from legacy projects is growing as existing contracts expire. In addition, major suppliers including Russia’s Novatek, France’s TotalEnergies SE and Malaysia’s Petroliam Nasional Berhad, aka Petronas, have already sanctioned projects over the past few years without contracting all of the associated supply.
The analysis comes as LNG suppliers have racked up a number of long-term supply contracts following a dearth of activity last year as the pandemic weighed on demand. The terms tend to be shorter as LNG has become more commoditized. Buyers are favoring five- or 10-year contracts over once popular 20-year agreements.
Wood Mackenzie said the long-term buyers’ market is likely to recede only when it becomes clear that demand will outstrip supply from Qatar and Russia. The consultancy anticipates a 50 million metric tons/year (mmty) supply gap by 2030, almost all of which could be satisfied by new projects in those two countries. Qatar and Russia also appear willing to develop new projects without firm contracts in place, WoodMac said.
The consultancy said the addition of supply controlled by Qatar Petroleum (QP) would be key in the coming years. New volumes from the Golden Pass LNG joint venture with ExxonMobil and the North Field East expansion are expected to boost its portfolio, while about 20 mmty of legacy contracts are expected to expire. That means that more than 60% of the QP portfolio could be uncontracted by the end of the decade.
“Qatar has what buyers want – it is offering reliable low-cost and low-carbon LNG – and it has plenty of it to market,” the consultancy said. “This is putting pressure on competitors and forcing other sellers, who are keen to lock in long-term contracts, to the same level – presently around 10.2% Brent plus a small constant” in some cases.
While Qatar and Russia are expected to be key players, the consultancy said there could be some opportunities for North American developers to attract buyers as well.
“Rising oil and gas prices could see U.S. LNG and Henry Hub-linked deals back in the money,” Farrer said. “And it is possible that portfolio players and traders who are short in the mid-2020s may see an opportunity to access new North American supply now.”
Wood Mackenzie expects the rally in Asian spot prices to continue over the next five years as Asian LNG demand overtakes supply growth and pulls more Atlantic volumes into the Pacific, causing the market to tighten further.
Most legacy buyers in Asia are not looking for new long-term volumes and are focusing instead on increasing flexibility in their LNG procurement portfolio, “partly due to energy transition concerns,” said the consultancy’s Daniel Toleman, senior analyst, LNG Asia. However, some buyers are looking for term contracts in markets such as China, South Korea, Pakistan and Bangladesh.
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