Long-Term LNG Becomes Sellers Market As Prices Soar

• Energy security and emissions reduction targets, especially in China, are prompting more buyers to seek long-term contracts
• The sellers, for their part, now ask for higher prices in the discussions

Surging spot prices of liquefied natural gas in Asia are giving LNG producers and sellers an advantage in contract negotiations for long-term supply with buyers, industry participants with knowledge of ongoing talks have told Reuters.

Buyers in Asia, which relied very much on spot supply last year when LNG spot prices plummeted to $2 per million British thermal units (mmBtu), are now looking to lock in more long-term gas supply as spot prices hit a record of over $50/mmBtu for some cargoes traded earlier this month.

Energy security and emissions reduction targets, especially in China, are prompting more buyers to seek long-term contracts.

The sellers, for their part, now ask for higher prices in the discussions, according to Reuters’s sources.

The need of buyers to hedge against future extreme volatility in LNG spot prices – as it has happened over the past year – gives advantage to sellers.

As per Wood Mackenzie estimates cited by Reuters, the volume of contracted long-term LNG supply this year has increased from a decade-low in 2020 and is similar to the levels seen in 2018 and 2019.        

Just last week, U.S. Cheniere Energy signed a sale and purchase agreement (SPA) with a Singapore unit of Chinese firm ENN Natural Gas – the first deal since the trade war between the U.S. and China erupted.

The purchase price for LNG under the deal is indexed to the Henry Hub price, plus a fixed liquefaction fee.

Several Chinese energy giants have intensified discussions with U.S. LNG exporters to secure long-term supply deals in light of record spot prices in Asia, rising demand, and the specter of power shortages, Reuters reported last week, quoting industry sources.

The current energy crisis and soaring LNG spot prices will change the way buyers purchase gas, Massimo Di Odoardo, Head of Global Gas Analysis at WoodMac, said last week.

“The instinct will be to look for security of supply – as Chinese buyers have just done in signing longer term contracts at higher prices. Buyers may also look for more non-gas hub LNG pricing, including US Henry Hub-based contracts,” Di Odoardo noted.

By Tsvetana Paraskova for Oilprice.com

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