Shell LNG deal with Turkey’s Botas priced at under 11% to 11.2% formula to crude oil: sources

Shell’s LNG long-term agreement with Turkey’s Botas for 4 billion cu m/day has been priced on a hybrid formula, with the crude oil-linked price range from just below 11% to 11.2% against an oil benchmark, market sources told S&P Global Commodity Insights.

The 10-year agreement, through which Shell will supply LNG to Botas, is on a delivered ex-ship basis, with a portion of the supply on a free-on-board basis. The DES leg of the agreement is linked to crude oil prices, while the FOB leg is tied to Henry Hub prices, market sources said.

The deal price is influenced by flexible terms under the contract that Shell has the option to exercise, including the option to cancel the delivery of up to two cargoes per year and the flexibility to divert cargoes to Europe under a margin-sharing mechanism between Shell and Botas, according to market sources.

Shell declined to comment, and Botas did not respond to Commodity Insights' queries for a comment.

Market sources said the deal demonstrates how some sellers can aggressively value flexible terms in LNG long-term contracts to offer a competitive price and secure buyers.

“Perhaps it makes sense if you value the [flexible terms] like that,” a market source based in Europe said.

LNG pricing dynamics

For most term deals in Asia, LNG market participants use a crude oil “slope” formula as proxy pricing, in lieu of a spot price reflecting LNG fundamentals such as Platts JKM or the Northwest Europe marker. Platts is part of Commodity Insights.

The Platts JKM October deliveries were at $13.16/MMBtu Sept. 4. A fixed formula of 11% to the Dated Brent price of $75.225/MMBtu would imply a price of $8.27/MMBtu. This compares with the Platts JKM calendar year 2027 derivative assessment of $9.486/MMBtu at the London close Sept. 4.

The deal price range of under an 11% to 11.2% slope to crude oil signals a further deterioration in prices for crude oil linked contracts and highlights the variance of term contract formulas not linked to LNG benchmarks.

For comparison, Qatar Energy's contract with Taiwan's CPC announced in June was priced around a 12.7%-12.8% slope to crude oil for 4 million metric tons per year over a 27-year tenure, with the supply beginning around 2027 as well.

A Singapore-based market source said Shell appears to have placed a steep valuation on the flexibilities under the latest contract, including the option to cancel cargoes, allowing it to offer a relatively competitive oil pricing formula.

Another market source based in the Middle East said that buyers conceding to flexibility under a contract with respect to agreement terms such as volume, volume diversions and delivery windows, among others, are becoming increasingly common to achieve a better price during negotiations.

Botas aims to be major regional gas hub

The statement from Shell and Botas highlighted Botas’ diversifying and expanding gas infrastructure, including its growing role as a “major regional gas hub” to load LNG from ports.

“Shell priced [the agreement] considering it as a gateway to take gas from Turkey to Europe. So, there's a huge diversion optionality [regarding the LNG volumes],” a source familiar with prevailing long-term contracts said.

“The deal will enable Botas to expand its LNG access and use its extensive terminal and pipeline infrastructure to help [Turkey] to diversify its gas resources and become a major regional gas hub,” the statement from Shell said Sept. 2.

Comparing oil slope to East Med market

Platts assessed the price for the East Mediterranean marker -- the spot price for LNG cargoes delivered to all ports in Turkey, Croatia and Greece -- at $11.766/MMBtu Sept. 4, a spread of 37 cents against NWE, which reflects the price of LNG cargoes delivered to Northwest Europe.

Platts assessed the spread for East Med against Dutch TTF a premium of 17 cents/MMBtu Sept. 4. The spread was at a discount of 35 cents/MMBtu Feb. 26, when global LNG prices were at their lowest this year.

The spread between East Med and Dutch TTF has been at a discount of 12.34 cents/MMBtu on average so far in 2024. Further, Intercontinental Exchange data showed the average for calendar year 2027 for Dutch TTF was near $8.886/MMBtu.

Market participants have noted often that they use the forward curves of LNG and European gas indexes while discussing long-term LNG contract prices linked to crude oil and Henry Hub prices.