Petronas, Malaysia’s state-owned energy company, and the world’s third-largest LNG exporter is exploring shorter-term contracts and smaller cargo sizes in an attempt to attract more buyers. LNG buyers have been looking for greater flexibility in the terms of their contracts as supply continues to increase, giving them more options on where to buy.
“New demand creation is becoming a norm,” Ahmad Adly Alias, vice president of Petronas’ LNG Trading & Marketing said.
In China, Petronas plans to work with a partner to sell smaller parcels to meet the demand of small buyers, Ahmad said. The company is also exploring LNG sales as a transportation fuel for trucks and ships, Reuters reported.
Prices have fallen approximately 70 percent since 2014.
In Japan 7 MMTPA in Petronas’s LNG contracts are coming up for renegotiation
The news that the company is considering more flexibility in its contracts comes as the company prepares to renegotiate with some of its largest buyers.
Japan, its biggest buyer, has contracts expiring next year through both Tokyo Electric Power Company and Tokyo Gas Co. Tokyo Electric’s current contract is for 4.8 million tons per annum while Tokyo Gas is currently contracted to purchase up to 2.6 million tons per annum.
“(Our) priority is to re-contract in Malaysia but probably volume-wise it will be changed. And, how we can agree to new terms and conditions with better flexibility or pricing,” said Shigeru Muraki, executive advisor at Tokyo Gas.
“We will compare with other sources, we will consider the diversification of supply sources or diversification of pricings.”
Petronas’ Ahmad said the company was currently working with long-term buyers to renew the contracts but did not give details.
In the interview Monday, Petronas Upstream CEO Anuar said long-term contracts have “almost become a novelty.” Petronas could do both short- and long-term contracts, he said. Related: Floating Oil Storage Down By A Third: OPEC Source
One-third of the world’s LNG purchasing power has created a buyer’s club
LNG exporters have been forced to offer more attractive terms to their buyers as new supply comes to the market from the U.S. and Australia, but buyers are also looking for more lobbying power in negotiations by forming a buyer’s club.
Korea Gas Corp. (KOGAS), Japan’s JERA and China National Offshore Oil Corp. (CNOOC), which collectively represent about one-third of the world’s LNG purchases, have formed a group to exchange information and “cooperate in the joint procurement of LNG,” in March of this year.
Market conditions signal an end to destination restrictions
Under the terms of the agreement, the buyers aim to extract concessions from producers that would give them supply flexibility, such as having the right to re-sell imports to third parties, something they are currently unable to do under so-called destination restrictions.
“We have created a platform to share, discuss and solve our common issues such as traditional LNG business practices, including destination restrictions,” said JERA spokesman Atsuo Sawaki.
Destination restrictions have made it impossible for LNG buyers to sell excess supplies, which they buy in fixed volumes as part of their long-term contracts. Because of this, buyers like KOGAS, JERA and CNOOC will be struggling with excess supplies in the next few years.
From a practical standpoint, the three members of the buyers’ club may be looking for a way to trade with each other:
- KOGAS buys supplies for winter;
- CNOOC buys for summer;
- JERA buys across both seasons.
This means the partners could potentially trade LNG to one another depending on demand within the group.
Other LNG shippers also talking contract flexibility
U.S.-based Cheniere Energy lined up long-term contracts with buyers in Asia and Europe while its Sabine Pass export facility was under construction. But the company has talked about flexible contracting and delivery for some time. Related: Oil Jumps As Saudis And Russians Agree To Extend OPEC Deal Into 2018
On the Cheniere Q1 2017 earnings call last week, Cheniere CEO Jack Fusco discussed how his company is addressing the issue of flexible contracting.
“We’re a full-service shop. So, a lot of the utilities around the world do not like the tolling model and they don’t like the FOB model necessarily because they don’t want to deal with shipping.
So, if you’re utility and you need reliable supply, you’d rather have that thing delivered directly to your dock, right? And that’s what we offer. So, we offer more flexibility, more customer options, if you will.”
Even back in October 2015, Cheniere’s Katie Pipkin, senior vice president of business development and communications, did an interview with Gastech in which Pipkin talked about Cheniere’s marketing group and the flexibility it has in contracting its so-called ‘excess LNG’.
Gastech: Do you have other avenues for sales in addition to these long-term contracts?
Pipkin: Yes, we have a Cheniere gas marketing operation as well. Our excess LNG, or LNG that is not sold under long-term contracts, is available to our marketing group to sell. For example, if we look at the nine liquefaction trains being developed at the Corpus Christi and Sabine Pass LNG facilities, on a combined basis, about 80 percent of that capacity will be sold under long-term contracts and 20 percent will be available for sale through our marketing group. Cheniere Marketing has strategically located offices in the UK, Singapore and Chile. LNG will be primarily sold under shorter terms and various pricing mechanisms through this business.
Cheniere shipped its hundredth LNG cargo in April.
By Oil and Gas 360
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