SINGAPORE- Asian liquefied natural gas (LNG) buyers are starting talks with producers to renew long-term contracts due to expire over the next few years, aiming to secure all-time low prices in deals likely to set new industry benchmarks.
A record volume of new LNG supply entered the market in 2019, driving spot prices to record lows for this time of the year and widened the gap with contracted supplies which are priced off stronger oil prices.
The abundant supply has toughened buyers’ bargaining stance, forcing producers to lower their asking prices and discuss exit clauses in new contracts, according to industry sources.
Most Asian buyers purchase LNG priced against Brent crude oil expressed as a price slope, or a percentage of the oil contract. Discussions for this price slope for new contracts have dropped to close to 11 percent, five industry sources familiar with LNG contract negotiations told Reuters. This compares with 13 percent to 15 percent about 10 years ago.
“The main drivers … are low spot prices, oversupply and intense competition,” said Nicholas Browne, analyst at Wood Mackenzie.
Most potential projects can achieve a satisfactory rate of return delivering LNG into Asia at 11.5 percent of $60 per barrel oil, he said. Brent is currently at about $63 a barrel.
All eyes are focused on Qatargas and Korea Gas Corp (KOGAS) who are locked in talks to renew their long-term contract, the sources said. KOGAS’s 20-year deal to buy 4.92 million tons a year of Qatari LNG expires in 2024.
The new deal could become a benchmark for others as Japanese buyers are also expected to start negotiating contract renewals over the next few years, the sources said. Such negotiations are typically opaque and could take months to finalize.
“We are in discussion with Qatargas to work on various ways for cooperation,” a KOGAS spokesman said. Qatargas did not respond to a request for comment.
While sellers are reluctant to lower prices too much due to the need for financing, especially for new projects, they are more willing to provide concessions in contracts, the sources said.
For instance, a walk-away clause has started appearing in some recent contracts where buyers and sellers are able to end the contract if both parties are unable to agree to a price review at the end of a certain time period, one of the sources familiar with the discussions said.
“These typically don’t appear in project financing contracts as those will require a firm commitment for a longer period, but about 25 percent of new contracts now have this clause,” the source said.
Buyers are also increasingly hedging their exposure with a portfolio of spot cargoes alongside long-term contracts, said Baldev Bhinder, managing director of law firm Blackstone and Gold.
“Until a viable Asian gas index emerges for long-term contracts, oil indexing will create the disparities that we see today,” he added. – Reuters