Qatar Energy's long-term LNG contracts with European buyers likely to include natural gas indexation

Qatar Energy's latest long-term contracts for delivery to Europe included a component of exposure to Europe's natural gas hub prices, market sources said, signaling an evolution in pricing mechanism for long-term deals.

Market sources said it was a sign that dynamics in the European LNG markets were evolving, and more closely linked to natural gas hub pricing than crude oil pricing, leading to the inclusion of natural gas hub prices in a long-term contract pricing formula.

A source familiar with the matter said Europe and Asia were increasingly using different pricing bases for LNG in long-term contracts rather than just oil-linked long-term contracts that typically use Brent crude oil indexes.

Notably, a few long-term contracts signed between Middle East suppliers and European buyers used natural gas indices such as National Balancing Point. The move to the Netherland gas hub Dutch TTF from NBP highlighted the former's ascendancy among European gas hubs.

A market source from the Middle East said that the pricing formula was likely to be a hybrid formula, which would include a component of the natural gas hub prices.

Some market participants were of the opinion that a percentage discount and a constant discount should be applied to the monthly average price of the Dutch TTF gas hub.

A few market sources were also of the view that long-term contracts signed between Qatar Energy and companies like TotalEnergies, Shell and Eni could be fully linked to gas hub prices instead of a hybrid pricing formula as it reflected the price relevant for downstream marketing of natural gas.

Qatar Energy announced long-term contracts with ENI for 1 million mt of LNG and with Total Energies and Shell for 3.5 million mt each with the tenure for the contracts at 27 years.

For ENI, the LNG will be delivered to FSRU Italia starting 2026. For Shell and Total Energies, the deliveries will be made at Gate LNG terminal in Rotterdam, Netherlands, and Fos Cavaou LNG in Southern France, according to Qatar Energy's press releases.

When contacted, a Shell spokesperson said the company was unable to comment given that the matter was confidential and commercial in nature.

Qatar Energy, ENI and Total Energies have yet to respond to S&P Global's queries.

These contracts are part of the expansion of Qatar's LNG capacity which is expected online from 2026 with Shell, ENI and Total Energies having equity in the expansion projects.

The North Field East expansion project will have four trains for a total 32 million mt/year of LNG and expected to be online by 2026, while the North Field South project will be expanded by two trains for a total of 16 million mt/year of LNG starting 2027.

Market participants interpreted Qatar Energy's press releases to mean that the contracts signed with ENI, Shell and Total Energies are likely to have destination restrictions.

They said there were different ways in which a pricing formula could be used with some traders expecting the Dutch TTF prices to be used as a floor in the pricing formula. Others view it as primarily a Brent-linked pricing formula with a cancellation option.

"Personally, I think it is primarily a Brent-linked, single destination DES but some sort of cancellation option for Qatar with some TTF-related replacement cost," a Singapore-based trader said.

A second Singapore-based trader said he would not be surprised if Dutch TTF prices were included in the formula so as to capture the upside in spot market prices.

Platts assessed JKM, the benchmark price for LNG cargoes delivered to Northeast Asia, at $18.42/MMBtu for December on Oct. 30, S&P Global data showed. The Platts DES Northwest Europe Marker for December was assessed at $15.414/MMBtu Oct. 30.