KOGAS shortlists BP, Trafigura, Total for 2.1 mil mt/year long-term LNG contract

South Korea's state-owned Korea Gas Corporation has shortlisted BP, Trafigura and Total Energies for a long-term contract for a cumulative volume of 2.1 million mt/year starting in 2027 at sharply competitive prices linked to Henry Hub and crude oil, market participants told S&P Global Commodity Insights.

Market participants said that the price on a crude oil-linked basis was around a slope of 11.3% to 11.5% to ICE Brent for the 15-year contract.

The Henry Hub formula likely included a slope of 121% to Henry Hub and a constant of $4-$4.3/MMBtu.

KOGAS is close to securing these prices after agreeing on several seller-friendly contract flexibilities, according to market participants.

KOGAS, BP and Trafigura declined to comment on the matter, while Total Energies did not respond to a request for comment.

The seller-friendly flexibilities include setting the destination of supply to DES South Korea instead of DES JKTC, a trade term that would prevent KOGAS from reselling these cargoes to other Northeast Asian buyers.

Another such flexibility involves some cross-month delivery windows and large delivery windows that the seller can progressively narrow after coordinating with KOGAS.

The seller also has the flexibility to include large cargo size ranges, exceeding the optional tolerance levels. Traders noted that the specifications of the LNG to be delivered are not restrictive and reasonably broad.

South Korea issued a request for a proposal for the long-term contract in May 2024.

Flexibility-related discounts

Market sources indicated that the sellers likely offered competitive prices due to the contract flexibility permitted by KOGAS. The slope to Brent crude is currently in the low to mid-12s% range for long-term contracts for cargoes delivered to Northeast Asia.

KOGAS may have provided sellers with the flexibility to negotiate lower prices, particularly regarding delivery windows, according to market sources. With its four existing LNG terminals and one under construction, KOGAS can offer sellers flexibility in delivery schedules.

Due to similar contract flexibilities, KOGAS awarded the medium-term contract for 2025-27 to two or three portfolio companies in August 2024 at prices near the JKM full-month average minus 40-50 cents/MMBtu.

LNG market participants often use the crude oil "slope" formula as a proxy for pricing, instead of relying on a spot price that reflects LNG fundamentals such as Platts JKM.

However, when quoting the slope to crude oil in a term contract, market participants closely monitor the LNG forward curve while establishing the slope to the forward curve or the constant in a Henry Hub-linked formula.

The extent of the discount on a JKM-linked basis in the medium-term contract is equivalent to the discount observed on a crude-linked contract.

According to Platts data from Commodity Insights, if the Dated Brent price was $82.255/b and JKM at $13.617/MMBtu on Jan. 17, a 50-cent discount to JKM would imply a 0.6 percentage point difference in the slope.

The fundamentals of crude oil and LNG are independent, which can often lead to their price directions moving oppositely.

LNG offtake from US-based projects typically utilizes a Henry Hub-linked pricing formula. The cost includes the feedgas cost, calculated at a slope to the Henry Hub prices, along with a fixed liquefaction fee.

Henry Hub prices in the US are influenced by weather conditions, infrastructure and the supply and demand dynamics of natural gas within the country.

Platts assessed the JKM derivative for calendar years 2027 and 2028 on Jan. 17 at $10.3/MMBtu and $9/MMBtu, respectively.

Contracts' expiry

A long-term contract for 4.1 million mt/year between KOGAS and Oman LNG expired in December 2024. Additionally, South Korea's long-term contract with Qatar Energy for 4.92 million mt/year expired in 2024.

Three more term contracts, for a cumulative volume of 1.24 million mt/year, are set to expire in 2025. In 2026, term contracts with Qatar Energy for a volume of 2.1 million mt/year will also expire.

So far, KOGAS has finalized a medium-term contract for 2025-27 for 2.1 million mt, and a 0.5 million mt/year contract that will begin in 2026 with Woodside.

"The expired and expiring contracts were signed at a higher pricing slope of 15% and 16%, respectively, and KOGAS has previously cited high prices as a reason for not renewing these contracts," Commodity Insights analysts said in a November 2024 report.

"As the two markets [Qatar and South Korea] continue to strengthen their ties, this could possibly lead to more LNG-related contracts being signed between the two, especially as existing contracts are expected to expire."