QP customers angle for more flexible LNG contracts in evolving market

As Qatar Petroleum readies its long-awaited expansion of the world's largest offshore gas field, it is likely to face pressure from LNG buyers for more flexible contract terms in an increasingly competitive market.

QP has historically relied almost solely on oil indexation in its long-term contracts, but as global LNG markets increasingly commoditize and the use of benchmarks grows, Qatar's commercial strategy has shifted, including greater use of the Japan Korea Marker (JKM).

Further market-based pricing changes can be expected, especially when QP brings more LNG production online, analysts and traders say.

"Due to market uncertainties, there is a likelihood we are transitioning from a place where Qatar was very much focused on achieving the best price for its LNG, to a place where they are thought to be more flexible on the pricing, if it means they can maximize the placement of their additional production," Jean-Michel Saliba, a Middle East and North Africa economist and director with Bank of America Merrill Lynch. "This reflects the market reality."

LNG exports from Qatar totaled 20.5 million mt in the first quarter of 2021, up 2.5% year on year.

The two-phase North Field expansion project is projected to boost Qatar's LNG exports by 64%, with capacity rising from 77 million mt/year to 126 million mt/y through 2027. When complete, it will likely make Qatar the leading exporter of LNG globally.

QP Chairman and CEO Saad al-Kaabi has hinted that the company will be moving away from its more rigid and long-term contracts it has used in the past, saying that its pricing seeks to reflect fundamentals in each market.

"We go with the market. It is supply and demand. When there are ample supplies, prices do come down," Kaabi said June 22 at the Qatar Economic Forum.

"We are very disciplined in what we do in our marketing, looking at how we can be in competition with ourselves to be the lowest cost producer, then place volumes in the markets that are growing most."

QP also set up a trading arm in November, mandated with building a globally diversified portfolio and managing risk through physical and derivatives trading, which was seen by market observers as Qatar recognizing the increasing role spot trading is expected to have in global LNG trade.

Delinking from oil

First gas from QP's expansion is expected in the first quarter of 2025, with the first phase of the project involving four new 8 million mt/y LNG trains coming online in 3-6 month intervals.

Much of the new gas volumes is likely destined for the growth markets of Asia.

At present, most LNG contracts in place in Asia are oil-linked. Rising competition from other LNG projects could pressure QP to delink its contracts from oil prices in a bid to maintain and expand market share.

JKM could play a much bigger role, with traders saying the benchmark's adoption in physical and financial contracts is growing fast, as there is an increasing market need for pricing reflecting LNG market fundamentals.

"In the last year we have not only seen QP bid into spot tenders, a new theme for them, but also utilize JKM in new long-term contracts, underlining just how important the benchmark has become to global LNG pricing and trade-flows," said Samer Moses, a senior analyst of EMEA LNG at S&P Global Platts Analytics.

But spot LNG prices have been hit by extreme price volatility over the past year, with the JKM benchmark spot Asian LNG price hitting a low at $1.825/MMBtu at the end of April 2020, before rising to a record high $32.50/MMBtu mid-January.

Oil prices have not seen the same rise, and Saliba said that could make some market participants cautious of fully delinking from oil.

"The spike in LNG spot prices earlier this year may give some second thoughts to consumers," said Saliba. "It is more of a gradual shift in the contracts over time. If the market is oversupplied, I think there will be more push at that point in time."

Bank of America Merrill Lynch expected Qatar to achieve a blended LNG export price of $8.2/MMBtu in 2021, down from a peak of $14.5/MMBtu in 2013, it said in a report in May.

Buyer leverage

In the last seven months, QP has signed over 8 million mt/y in new long-term contracts.

That still leaves about 62 million mt/y of uncontracted capacity from the North Field expansion and QP's share of the Golden Pass LNG project in the US to market through 2027, according to Platts Analytics.

Companies like China's Sinopec and Taiwan's CPC have managed to attain record-low Brent-linked term pricing in 2020.

Sinopec's deal was at a Brent slope of 10.19%, likely the lowest slope in the history of LNG, Platts reported in 2020, a sign of the increasing pricing power held by consumers. By comparison, when QP began selling LNG more than a decade ago, slopes were more typically 15%, Saliba said.

The lower the slope, the more of a discount relative to oil prices for LNG supplied in the contract.

Beyond pricing, companies may also seek diversion provisions enabling them to redirect shipments to other ports, or FOB shipping terms.

"Ultimately the consumers can communicate their intentions well and Qatar will respond," Saliba said.