Demand for term LNG contracts firms amid supply security concerns

LNG term contract volumes have leapt this year, as energy security becomes paramount worldwide, with markets -- most notably among them China -- snapping up deals to head off potential shortages, industry sources and analysts have told S&P Global Commodity Insights.

While long-term deals have become increasingly appealing to buyers, short and medium-term arrangements have remained important, due to the flexibility they provide, industry observers said.

The LNG supply response takes a minimum of around four years to come through and 2022-27 represents a period of "reshuffle", according to Michael Stoppard, global gas strategy lead and special adviser with S&P Global Commodity Insights.

Most of the recent term deals have been for volumes from either projects yet to reach final investment decision, or from part of capacity expansions at existing developments.

China, Europe lead in securing long-term contracts (mil mt/year)

In 2023 to date, long-term contracts for about 45.25 million mt/year have been signed worldwide, of which 29.9 million mt/year were pre-FID contracts, according to S&P Global data.

Recent buyers inking long-term LNG contracts -- primarily those with tenures in excess of 15 years -- come from China, South Asia, and Europe, with fears of future energy shortages prompting many to lock in supplies, despite prices having eased now from 2022 record highs.

Asian LNG spot prices hit a record high of $84.762/MMBtu on March 7, 2022, reflecting the impact of the Russia-Ukraine war. Platts, part of S&P Global Commodity Insights, assessed the August JKM -- the benchmark price for spot LNG in Asia -- at $11/MMBtu July 12.

Quenching Asia's thirst for LNG

"Major sources of supply will come from either the US or Qatar. Russia was the other option, but they have taken themselves out of the picture," one industry source said.

Expansion in LNG production capacity by Qatar has driven multiple contracts being signed by QatarEnergy. The country aims to increase its volumes by 64% via two phases of its North Field expansion project, raising capacity to 126 million mt/year by 2026 from 77 million mt/year.

On June 20, QatarEnergy announced an agreement to supply 4 million mt/year to China National Petroleum Corporation. This deal -- signed for 27 years, with an equity investment into LNG trains -- is like the one Qatar inked with Sinopec in 2022. The new deal was heard to be on a Brent-linked basis, at a slope of around mid to high 12%.

China's Zhejiang Energy signed a long-term contract in July to buy 1 million mt/year of LNG from Mexico Pacific's proposed Saguaro Energia LNG export terminal. Under the agreement, Zhejiang Energy will buy LNG volumes on a FOB basis over 20 years.

In June, China's ENN signed a 20-year sale and purchase agreement with Cheniere for 1.8 million mt/year on a FOB basis with linkage to the Henry Hub. The deliveries are set to commence mid-2026.

In all, Chinese companies have signed about 10.3 million mt/year in contract volumes so far in 2023. But other Asian markets are also scouring for deals.

"Despite the strong pickup in LNG demand from Europe owing to the reduction in Russian pipeline gas, the long-term growth continues to be concentrated in Asia from existing larger markets like China and India and emerging markets like Thailand, Bangladesh, Pakistan, Vietnam, and others," according to Ayush Agarwal, an LNG analyst at S&P Global.

In South Asia, Bangladesh's PetroBangla inked a contract with QatarEnergy in 2023 for 1.8 million mt/year supply at a slope of 12.65% for 15 years starting 2026, according to market sources.

Bangladesh has also signed a contract with Oman's OQ Trading for 10 years starting 2026, at a price of 13.35% of crude oil plus 50 cents/MMBtu constant, sources said.

Meanwhile, India is also scrambling for supplies to meet its energy needs while also accelerating its energy transition.

"India and Qatar are expected to conclude the renegotiation of their existing 8 million mt/year term contract in 2023, which is also an opportunity to add any additional volumes under these discussions. We might see some ramp-up in the existing volumes during these renegotiation discussions with Qatar," Agarwal said.

Recent US LNG deals by European buyers -- including the Venture Global-SEFE deal and the Equinor-Cheniere SPA -- are also seen a vital step to wean off reliance on Russian pipeline gas.

Flexibility

Meanwhile, Asia-Pacific LNG suppliers continued to find willing buyers that prioritize shipping flexibility, smaller volumes and narrower contract tenures.

Brunei LNG issued an RFP in February, offering 0.25 million mt/year of LNG over three years starting 2024.

Market sources said that the tender was heard to have been awarded to a portfolio player on a Brent-linked basis at 17%.

More recently, Vitol and Merakes LNG announced an agreement for about 0.55 million mt/year for 3 years on a FOB basis, with a possible one-year extension, following the conclusion of an open sell tender in February by Merakes.

Korea Southeast Power, or KOEN, was seeking around 0.65 million mt/year of LNG for delivery across five years starting 2027 on a Brent-Henry Hub hybrid basis. The tender, slated to close June 20, was subsequently extended till June 27.

Asian tender activity surge

Weakening LNG prices and extreme temperatures have also prompted spot procurement in Asia, although, compared with term contracts priced at a 13.5% slope to Dated Brent crude, spot prices are still around $2/MMBtu higher.

Asian spot prices have averaged about $13.62/MMBtu in the year-to-date, compared with $33.98/MMBtu in 2022.

Indian companies have awarded over 15 spot purchase tenders. Bangladesh has launched over 10 such tenders, and Thailand's PTT has also sought cargoes through over 13 buy tenders so far this year, as the country grapples with a heatwave.

Spot activity from India and China will likely ramp up if prices remain below $10/MMBtu, some sources have predicted, adding that new LNG importers -- such as Vietnam and the Philippines -- are also exhibiting increased purchasing appetite on lower prices.

The Philippines' First Gen Corp. recently concluded a spot purchase tender awarded to Shell, while Vietnam's PV Gas commissioned a cargo for its Thi Vai terminal, also from Shell.