Since the start of this year, the global LNG market has been undergoing many changes. The growth of LNG supply is accelerating. This, however, has coincided with a softening global demand for LNG, as demand growth in Asia—the global engine for growth—is slowing down for multiple reasons. Spot LNG prices in Asia have been in freefall since September 2018.
The global LNG glut is creating a buyer’s market. Buyers are pushing for shorter term and more flexible contract clauses, including smaller annual contract quantities, higher volume tolerance, and more relaxed destination restrictions. Even traditional buyers are advocating for greater flexibility in both legacy and future contracts because of uncertainties in their domestic energy mixes, for example, the restart of nuclear power in Japan.
In addition, the shift of demand from developed markets to emerging markets makes overall demand less secure and less creditworthy. Demand fluctuations will occur more often.
All these movements are pushing the supply side of the LNG industry to be more flexible and calling for more innovations of the LNG value chain. An increased number of intermediaries—global portfolio players and trading houses—are entering the market. They have the capacity to lock into longer-term sales contracts and resell on a shorter term and more flexible basis. They hand over and receive cargoes at different locations around the world responding to market signals.
Also, thnks to low prices and flexible contracts (no destination clauses), the advent of US LNG offers a more flexible source of supply as well. Currently, the cash cost of LNG transported to Asia from US is about $3.5-4/MMbtu. As Asian spot prices continue to fall, US LNG products are returning to Europe. Data show that in this year’s first 7 months, European LNG imports have increased by 88%. In addition, the US LNG liquefaction plant can achieve market rebalancing by reducing production capacity.
International oil giants as well as large-scale national oil companies are emerging as super-market players. They not only promote the capacity building of upstream projects, but also actively participate in the short and medium-term marketization activities of LNG.
For example, Shell has a liquefaction capacity of 34.3 million tons in 2018, up 3% from 2017, but thanks to the substantial increase in third-party trade volume, the company’s annual LNG sales amounted to 71.21 million tons, an increase of 8%.
Evolving pricing formulas
The recent global LNG pricing practice has continued the trend of the previous years, gradually expanding from a single formula linked to oil prices to increasingly diversified hybrid pricing formulas linked to many potential indices in flexible ways.
In April, Tokyo Gas announced a 10-year deal with Shell to purchase LNG using a coal-linked pricing formula. This is the first time a pricing formula linked with a coal index has been used with LNG contracts and aimed to better avoid the cost risk of gas-fired power generation. This is regarded as an important step for enabling LNG to better compete with cheaper coal in Asia’s power sector.
In September, EOG agreed to sell gas to Cheniere for 15 years starting in early 2020. The LNG associated with 140,000 MMbtu/day will be owned and marketed by Cheniere. EOG will receive a price based on Asian JKM. The move towards an LNG price link will give Cheniere more flexibility in selling gas on a price structure that could be more attractive to Asian buyers.
Earlier this year Tellurian and Total SA signed an LNG sale and purchase agreement (SPA) from the proposed Driftwood LNG export terminal at a price based on JKM.
NextDecade Corp. signed a 20-year binding SPA with Shell for 2 million tpy of LNG. Three quarters of the LNG will be indexed to Brent crude oil prices and the remaining will be indexed to US gas price markers, including Henry Hub.
It is also reported that some buyers have begun trying to sign long-term supply contracts only in winter to reduce the risk of a seasonal rise in spot LNG prices.