Demand for long-term LNG contracts has risen sharply in the current year, with suppliers taking advantage of robust demand thanks to a global effort to reduce Russian imports by demanding much higher tariffs for new contracts long-term.
According to a Oil and Gas Journal report10-year LNG contracts are currently priced around 75% above 2021 tariffs, with tight supplies expected to persist as Europe aims to boost LNG imports.
Meanwhile, volatile spot prices and deteriorating supply prospects have sparked a rush by importers to negotiate long-term deals as they try to lock in prices.
Last year, the volume of long-term LNG contracts signed with end-user markets hit a 5-year high, and the momentum shows no signs of abating in the current year. So far this year, more than 10 million tonnes/year (tpa) of LNG has been signed for end-market users, according to a report from Wood Mackenzie.
For example, the Louisiana-based LNG company Sempra infrastructure, a subsidiary majority owned by sempra Energy (NYSE: SRE) (BMV: SRE), comes from signed his sixth long-term contract in five months. The agreement provides that Sempra Infrastructure’s Cameron LNG at Hackberry will supply 2 million metric tons of LNG per year to the Polish oil and gas company. Sempra Infrastructure has secured another 2 million tonne contract with Polish for its upcoming Port Arthur LNG facility in Port Arthur, Texas.
Most new contracts come from US procurement as operators push projects forward. All of these contracts are tied to North American prices. Meanwhile, Chinese buyers continue to dominate the market, signing more than 8 million tpy of new LNG sales and purchase agreements this year.
Related: China May No Longer Be a Growth Pillar for Global Oil Markets
“The Russian invasion of Ukraine has had a dramatic impact on long-term LNG contracts. Many traditional LNG buyers will not purchase gas or LNG spot, or renew or sign additional LNG contracts with Russian sellers. Spot prices have also been high and volatile, pushing many buyers into long-term contracts. Additionally, some buyers are reverting to long-term contracts on behalf of governments to protect national energy security,” Wood Mackenzie principal analyst Daniel Toleman said.
According to WoodMac, sellers are unwilling to accept a deal below a 12% slope of current Brent crude oil futures prices, compared to the just over 10% slope of deals ago. a year.
LNG contract prices are usually expressed as a slope, or percentage, of Brent prices.
For example, a 12% slope in the current first month Brent price of $111.50 per barrel would result in an LNG price of around $13.38 per mmBtu, although the contracts are not as straightforward on the pricing structure. This level would be well below current spot prices.
Contractual supply of LNG tied to the price of oil – a practice that dates back to the 1970s – is currently much lower than the cost of buying a cargo on the spot market. But this discount decreases as available supplies decrease.
The Ukrainian crisis, the energy transition, bad weather and the explosion in demand are creating a period of upheaval which is tightening supply like never before in the natural gas industry. Credit Suisse has estimated that the global LNG market could be short by nearly 100 million tonnes a year by the middle of the decade if the world decides to cut off Russian gas.
LNG sellers in the Middle East are currently demanding bids above 12%. According to Toleman, these agreements have limited flexibility and seasonality and are fixed in a market, so the slope of a “normal” contract is actually higher at 12.5-14%.
“There’s been news about sellers wanting 16% or 17% for 10 years, but we haven’t been able to prove it. Short-term offers can attract these rates. We think sellers can get slopes of 16% for 2 or 3 year contracts with volumes ending before the end of 2024. The range is slightly lower at 14-15% for 4 or 5 year contracts with volumes that end in 2026.says Toleman.
Chinese buyers continued their low-cost LNG supply strategy. Since mid-2021, Chinese buyers have targeted Henry Hub deals with liquefaction tariffs below $2/MMbtu.
In Europe, the French multinational utility company Engie S.A. signed up to 1.75 million tpa for 15 years from next decadeRio Grande, a project that will use carbon capture and storage (CCS) to reduce its carbon footprint.
“Recent transactions related to the Henry Hub Brownfield have been rumored to have liquefaction toll charges below $2/MMbtu. This follows agreements signed last year in a similar range. We expect higher capacity charges for Henry Hub-related deals currently under negotiation. This reflects two trends. First, more advanced projects capable of delivering LNG by 2025-2026 will attract premiums. Second, rising raw material, labor and EPC costs are driving up the cost of delivering projects on the US Gulf Coast, in turn driving higher capacity charges.“said Toleman.
Resurgence of long-term offtake agreements
Unsurprisingly, the strength in LNG markets has spurred a resurgence in long-term off-take agreements, which experts see as key to advancing LNG export projects to final investment decision (FID).
Indeed, potential FIDs in 2022 will support a more than double increase in U.S. LNG export capacity, with FID in 2022 contributing to a capacity expansion of approximately 15.1 billion cubic feet per year. day (Bcf/d) compared to the 13.8 Bcf/d of LNG Export Capacity operating in the United States today.
Namely, Venture Global announced FID for its Plaquemines LNG project in May after securing $13.2 billion in financing. Plaquemines marks the first FID for an LNG export facility in the United States since Venture Global’s Calcasieu Pass in August 2019.
Other projects related to FID announcements this year include Tellurian Inc.. (NYSE: TELL) of the first phase of its Driftwood LNG project; Energy Cheniere(NYSE:LNG) Corpus Christi Stage 3 expansion this summer, plus Energy transfer(NYSE: ET) and NextDecade Corp. (NASDAQ:NEXT), both of which are seeking customers for their LNG projects in Lake Charles, Louisiana and Rio Grande in Brownsville, Texas, respectively.
Alex Kimani for Oilprice.com
More reading on Oilprice.com: