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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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The Power Has Shifted In LNG Markets

LNG Tanker

One of the most influential figures in the LNG market has claimed that a return to long-term LNG contracts is crucial for the sector.

It was a statement that most liquefied natural gas (LNG) buyers don’t necessarily want to hear; in fact, it goes against the fundamental changes currently underway in global LNG markets.

Yesterday, Yury Sentyurin, the new head of the Gas Exporting Countries Forum (GECF), an industry group representing gas sellers, said, in comments carried by Bloomberg Markets, that LNG prices still need to be linked to oil prices to keep revenue predictable for producers, particularly since some US$8 trillion worth of investment in the fuel is needed by 2040. GECF members include Russia, Iran, Algeria and Qatar (currently the world’s largest LNG producer), and its headquarters are in Doha, Qatar.

Sentyurin said that "[LNG] consumers should understand the peculiarities which producers face. Security of investment and supply can only be on the basis of long-term contracts closely connected to oil prices so we could plan further investments into crucial infrastructure."

He added that continued expansion of supply is needed to meet demand that’s forecast to grow at an average of 1.6 percent per year until 2040.

Related: UK Gas Crisis: Out Of The Frying Pan Into The Fire

Misses the mark

While Sentyurin is correct that the global LNG sector will need substantial infrastructure investment in the long term, even if his projection is more than two decades away, his comments that consumers should understand the peculiarities of producers misses the mark.

Until the past few years, these same LNG consumers, notably Japan, the world’s largest LNG importer, South Korea the second largest LNG importer until being eclipsed by China at the start of the year, Taiwan, India and others, were are at the mercy of LNG producers’ oil-price indexation, as well as long term deals with restrictive take-or-pay clauses, and equally restrictive destination clauses to name just a few problematic contractual components.

The quandary for LNG customers who had to enter into long-term 20 and even 30-year off-take agreements was manifold since they were mostly anti-competitive in nature and, worse yet, whose terms were mostly secretive with a problematic corresponding lack of transparency for the industry. Yet, with a somewhat limited supply of the super-cooled fuel until around the start of 2015, buyers had little choice but to comply.

Markets awash in LNG

But things can change drastically in just a couple of years. Since 2016, with Australia now poised to have as many as ten major LNG export projects operational, followed by the U.S. which now has two export projects on-stream and will have five export projects operational by the end of the decade, the market has switched from being stretched thin to being over supplied – all good news for buyers thereby changing the rules of the game. This is a development that has been hard for LNG exporters to accept, apparently including one of its representative groups, the GECF. Related: Increased Oil Hedging Hints At Permian Production Boom

While new LNG projects are indeed needed to offset a possible thinning of supply by roughly the mid part of the next decade, possibly earlier given China’s exponential gas usage increases per government mandate, the switch back to the traditional model of buyers’ funding massive CAPEX LNG projects will likely be a thing of the past. Will larger projects still be built and funded in part, with long-term off-take agreements? Yes. But, will that become the norm again as it was for decades? Decidedly not.

New market dynamics dictate another scenario unfolding as the super-cooled fuel is now being increasingly traded on the spot market as well as shorter term deals, particularly in Asia, which represents two-thirds of all global LNG demand.

In fact, as LNG markets continue to be well lubricated by Australia, U.S. and Russia, the fuel will increasingly trade more like a true commodity, similar in some aspects as iron oil and crude oil.

Sorry Mr. Sentyurin, I think your message will not find a receptive audience among LNG consumers and buyers.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on March 14 2018 said:
    The power has not shifted in LNG markets. There is a genuine need for LNG prices to continue to be indexed to oil prices not only to keep revenue predictable for producers and supplies steady but also to eliminate both volatility in the market and the ability of any one player to influence prices and any incentives to do so.

    Gas-indexation to spot prices will not necessarily result in lower prices, but will definitely create problems of price volatility which will have as a consequence the inclusion of a large risk premium in gas prices by the market’s invisible hand at the expenses of consumers.

    Gas production costs are in fact linked to oil field development costs and the oil and gas companies’ strategies to develop the one or the other type of field. If average gas prices and producers’ revenues are not lucrative enough, they would prefer to invest in developing new oil fields than new gas fields. So in fact a deep-rooted linkage does exist.

    Thus the replacement of oil-indexed price with a gas-indexed price would have the unfortunate effects of introducing higher risks than it is presently with oil indexation.

    Long-term, oil-indexed contracts will remain the cornerstone of security of supply for the import-dependent countries.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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