Oil linked long-term LNG contract prices to continue to fall in buyers' market: S&P Global

Long-term LNG contract prices of around 12% indexation to Brent oil should continue to fall as current offers are comparable to the contracts signed in 2017–19 when the global LNG market was in an under-investment cycle, according to an April report titled "Global LNG glut and tomorrows contracts" by Zhi Xin Chong, senior director at S&P Global Commodity Insights.

"As we swing into a buyers' market, concessions from suppliers in the form of lower prices and additional flexibility will once again be needed to secure long-term contracts with buyers in Asia," Chong said.

Asian LNG buyers have recently been negotiating for lower prices for long-term LNG contracts, both new deals as well as deals that were already being discussed and are about to be finalized, while suppliers like Qatar and US LNG exporters fight for market share.

Chong said that LNG buyers can assess the relative value of an LNG contract using three methods -- the comparative price method based on the cyclicality of the global LNG market, the alternative fuel method that evaluates the price of LNG against competing fuels like coal or fuel oil and the incumbent gas price method that compares direct LNG procurement with the offers from suppliers like cheaper domestic piped gas.

"Nevertheless, over the next few years, the combination of an oversupplied market paired with an over-investment cycle will create downward pressure on prices for long-term LNG contracts. This bodes well for the growth of new emerging Asian markets that are on their energy transition journey," Chong said in the report.

Lower slopes

Traditionally, LNG term contracts served as the bedrock of the industry, providing stability for both buyers and sellers by locking in prices over extended periods. However, the current market dynamics, marked by an oversupply of LNG and intensifying competition, have challenged traditional pricing models that underpin these contracts.

In February 2024, QatarEnergy signed a 20-year contract extension with India's Petronet LNG for 7.5 million mt/year, reportedly at 12% Brent oil slope at a time when contracts were still in the mid to late 12% range.

"This sets a new benchmark in the market given its size and duration for a buyer in Asia," Chong wrote.

He said that an analysis of 70 LNG sales and purchase agreements of more than 1 million mt/ and longer than 15 years, including normalized FOB contracts, showed that "long-term LNG contracts have been on a general downward trend since 2007 as the market has grown with more competition from suppliers and market innovation such as the introduction of US LNG supply in 2016 that have driven down offers."

Contracts from 2002-2005 had oil price caps or S-slope mechanisms that were dropped when the market shifted into a sellers' market, but most contracts of these contracts have undergone price reviews to be more reflective of the market today, Chong said.

He also observed that emerging Asian buyers have often secured lower-priced LNG contracts, and it is likely that there is a price premium applied on traditional buyers.

"In new emerging markets, there is no benchmark in place, and price offers can be made more freely that will result in lower prices. Furthermore, the transparency of pricing information has improved over time, resulting in more aggressive offers from suppliers," the report said.

Commodity cycle

Chong said the current contracting environment is characterized by an over-investment cycle with almost 200 million mt of LNG being added by 2030 from new projects, a growth of almost 50% as large as the previous over-investment cycles in 2005-06 and 2013-17.

"In over-investment cycles, we have seen prices coming off by 1.5%-2.0% compared with previous periods. Based on this simple premise, if more liquefaction plants reach a final investment decision in 2024 that pushes up future capacity growth, it will eventually add to the oversupply and contribute to even more downward pressure on long-term LNG prices," he added.