LNG buyers seek to dismantle rigid long-term contract structures in flexibility push

LNG buyers are holding their ground in long-term contract negotiations with suppliers, pushing back on an array of rigid terms and conditions that traditionally favored sellers, signaling ongoing commoditization and evolution of the LNG marketplace despite recent upheavals.

The long-term LNG contract market is starting to look like a buyers' market again with two of the world's largest producers -- Qatar and the US -- vying for new customers, and willing to make concessions to close deals, according to industry executives and market participants.

The case for buyers firmed up this year as Platts JKM remained below the $15/MMBtu level, and the market could tilt even more in their favor towards 2027 when a new wave of supply is expected to hit the market.

LNG buyers are seeking shorter contracts, rights to divert cargoes – called destination flexibility, and more flexible seasonal deliveries, traders said. LNG importers are also looking to reduce the share of oil-linked long-term LNG in their portfolios while including more FOB volumes.

"The spot market has continued to take market share and that trend will continue. Liquidity will continue to increase, transparency will continue to increase and we'll end up with a spot price that can be hedged in the same way as Brent crude oil, gasoline or diesel," said Richard Holtum, global head of gas and power at Trafigura, in a recent interview.

"We are big believers in the spot market. We trade around 14 million tons of LNG per year, of which about half is shipped to Asia. Of that total, 80% are spot transactions and 20% term deals. We think that's about the right balance," he said, adding that Asian buyers understand the pay-off between price and flexibility.

"If you're signing a 20-year contract, you're taking a 20-year view on your suppliers' reliability, you're taking a 20-year view on your demand profile, you're taking a 20-year view on geopolitical risk and you're taking a 20-year view on price," he said.

"That seems like a pretty bold view to be taking. In the spot market you will get the volume when you need it, where you need it, and all at the prevailing market price," Holtum added.

More flexibility

The Ukraine crisis had briefly sent importers scurrying for the protection of contacts, some as long as 27 years, to manage energy security concerns. Through 2022, several buyers like Japan were largely protected from price volatility and supply scarcity because they were well contracted while India and China gave up nearly 20 million tons/year of spot supply that went to Europe.

But LNG origination executives, who are in charge of long-term procurement strategies in gas companies, said once the baseload requirement has been satisfied by long-term contracts, there is growing appetite to expand the flexible portion of portfolios.

This is being driven by many reasons including uncertainty around decarbonization regulation beyond 2030, and managing the trough of the commodity cycle when spot LNG prices could sink to new lows.

Chinese end-users, despite having signed up for over 40 million mt of US LNG contracts, said destination restriction clauses, favored by suppliers like Qatar, are a big disadvantage when they need more flexibility to deliver into the Japan-Korea-Taiwan-China region.

Others are choosing to wait for the post-2026 supply wave to bring down prices.

"We have been in negotiations for term contracts but as our agreements have not expired, we are not in a hurry and are waiting for 2026-27 when new supply comes online and when our existing term contracts expire," a southern Chinese end-user said.

He added that signing contracts linked to Brent or Henry Hub is risky if prices rise, and cited discomfort with the current liquefaction fees being offered on top of 115% HH.

"We have seen an evolution of Asian buyers in the sense that they now tend to request shorter duration of contracts. Before they used to be interested in the 20 - 25 years," Cristian Signoretto, Eni's director global gas & LNG portfolio, said in a recent interview.

He said Asian buyers were still signing long-term deals, but when it comes to a portfolio addition, they tend to ask for shorter durations and value a lot of flexibility to manage the uncertainty of the energy transition.

"They know they need to decarbonize the portfolio, but they do not know the speed at which they can decarbonize," Signoretto said. "So for them, it sometimes is difficult to lock in or commit for inflexible volumes. They need flexibility. This is something that they're requesting a lot," he said, adding that Brent linked prices were still "top of the agenda" but hybrid formulas with spot indexation are coming into market.

Signoretto said big utilities in Japan and the rest of Asia may stick to 60% - 70% of their portfolio on a DES basis, but 30%- 40% may be FOB to manage uncertainties, although DES contracts will remain the backbone of the market even if their share declines.

"My role is to make sure that between 30-40 million tons of LNG arrive in Japan and to do that, we need fully functioning short- and long-term markets," JERA global markets senior VP Jonathan Westby said at the Gastech 2023 LNG conference in Singapore, nothing that both markets are needed to secure a stable LNG supply.