ANALYSIS: Asian LNG buyers seek to lower long-term contract slopes as markets shift

Asian LNG importers are negotiating hard to bring down lower oil-linked price slopes of long-term LNG contracts amid expectations of a gradual shift toward a buyers' market for LNG, market sources said.

Market participants said buyers are not only asking for lower price slopes for new contracts, but also driving a hard bargain to finalize LNG contracts that already have binding term sheets, at prices around 12% of Dated Brent or even lower.

The shifting market dynamics have put sellers in a quandary as they compete for a shrinking share of high-value customers like Japan and South Korea, and are pressured to agree to a range of contractual terms and conditions to appease LNG buyers.

At least one Middle East LNG producer that recently finalized several sales and purchase agreements in 2024 received requests for lower prices for binding term sheets concluded in2022-23when supply was relatively tight and prices were higher due to the Russia-Ukraine conflict.

Its new contracts with European importers, a major Japanese energy company and international oil majors were signed around a 13.2% slope to crude oil on FOB basis, and 14.2% slope on DES basis, in line with original term sheets, but only after it conceded flexible contractual options for the buyers, sources said.

Additionally, a small group of Chinese, Japanese and Thai importers have delayed finalizing binding term sheets agreed in 2022-23 with the Middle East supplier, demanding lower slopes.

At least one major state-owned Indian LNG importer is also considering to renegotiate previously discussed contracts due to changing markets, while multiple Southeast Asian and Chinese offtakers are unwilling to discuss slopes higher than 12%, highlighting the challenge faced by LNG sellers in price-sensitive and emerging Asian markets.

Spot and long-term prices

Term sheets are agreements that have more details on pricing and contractual terms than a memorandum of understanding or heads of agreement. While they are close to resembling a final agreement, they can be subject to changes before being finalized as a legal contract.

Term sheets agreed in 2022-23 were priced near 13%-14.5% slope to crude oil, market sources said. But oil-linked contracts signed in 2024 for 10 years or longer -- such as the one between India's Petronet and QatarEnergy and Gail and Vitol -- were widely reported at much lower levels of around 12%-12.5% DES basis.

Spot LNG prices have also continued to ease from elevated levels of 2022-23, and with additional supply from the US and Qatar starting 2025, market participants expect both spot and long-term prices to be under pressure.

Platts assessed JKM, the benchmark price for LNG delivered to Northeast Asia, for June at over $10/MMBtu in early May, S&P Global data showed. Assuming a crude oil price of $85/barrel and a 13.5% slope, the price equivalent for LNG would be almost $11.5/MMBtu.

This price divergence or dislocation is exacerbated if worsening global conflict pushes up crude oil prices, while a steady wave of new supply pushes down spot LNG prices into single digits, exposing both LNG buyers and sellers to risks of using non-LNG pricing for LNG term contracts.

By using oil-linked or gas hub-linked pricing indexation, LNG buyers would be exposed to demand and supply fundamentals of an unrelated commodity, which has been compared to pricing oil against bananas.

Market participants expect more LNG contracts announced in 2022-23 to be negotiated lower as price slopes drop towards12% or even lower, as more contracts have included language around price reviews, and many deals were actually HOA or term sheets.

Market-based pricing

Some market participants have argued that negotiating for lower slopes when spot LNG prices are low opens up the contracts to be renegotiated for higher slopes when spot prices rise. For example, the ongoing arbitration around Venture Global's Calcasieu Pass is because of spot LNG prices rising sharply following the Russian invasion of Ukraine.

Market sources also pointed out that renegotiations to finalize preliminary agreements into final LNG contracts are common due to volatile markets. The terminology regarding whether a term sheet is legally binding or not can also vary significantly depending on the situation.

However, buyers are seeking to lower price slopes not just for converting term sheets to SPAs, but also for existing LNG contracts that are due for periodic price reviews, and for the renewal of expiring long-term contracts that constitute actual price renegotiations, especially in North Asia.

Companies assess exposure to different pricing basis and different LNG producing regions to balance risks, and suppliers' reluctance to agree to different LNG pricing basis is eroding.

While many market participants are resigned to oil-linked pricing and regular renegotiation in LNG contracts, the gargantuan supply of LNG expected to come to the markets later this decade and evolution of developing markets may call for innovative pricing mechanisms to include LNG pricing and iron out one of the existing mismatches, market participants said.