Sinopec’s preliminary LNG deal with TotalEnergies likely at 12% oil slope or lower

Chinese state-owned Sinopec's heads of agreement with TotalEnergies for the supply of LNG is likely being discussed at a price of around 12% crude oil slope or lower amid current market conditions, sources told S&P Global Commodity Insights.

The HOA signed on Nov. 4 allows France's TotalEnergies to supply 2 million mt/year of LNG to Sinopec for 15 years, starting in 2028.

The preliminary deal allows the seller to lower the headline price being discussed because of flexibilities, said sources. The deal considers flexibilities such as cancellation rights for deliveries of up to four cargoes that the seller can choose to exercise, they added.

Flexibilities have lately dominated the LNG market in long-term contract negotiations. Some of the flexibilities that buyers choose to get a lower headline price include seller's option to cancel delivery of cargoes, option to supply additional cargoes, letting the seller choose delivery windows, quality flexibility, extension of the contract, option to delay the start-up of the contract etc.

Since the deal is an HOA, the price is still subject to change before the parties agree to convert it into a sale and purchase agreement, which is a final binding contract. Not all HOAs successfully get converted into SPAs, and both pricing and contractual terms have been known to change depending on negotiations.

TotalEnergies and Sinopec did not respond to requests for comment.

If finalized, the under-12% oil slope would be the lowest slope to crude oil for a long-term LNG contract with a tenure of more than 10 years in Northeast Asia since 2022.

The deal marks a low for crude oil slopes in long-term LNG contracts signed in Northeast Asia that start delivery in 2028. Earlier agreements in the region were signed at a slope of mid- to high-12% slope range to crude oil, and prices have been declining on expectations of rising global supplies.

Most LNG term deals in Asia use a crude oil "slope" formula as proxy pricing, in lieu of a spot price reflecting LNG fundamentals such as Platts JKM, the benchmark price reflecting LNG delivered to Northeast Asia.

Portfolio strategy

TotalEnergies' global LNG portfolio was 44 million mt/year in 2023 with 20 million mt/year regasification capacity in Europe. The company looks to increase the share of natural gas in its sales mix to nearly 50% by 2030.

Since 2021, TotalEnergies purchased more than 15 million mt/year of long-term LNG, starting delivery as early as 2025, according to Commodity Insights. Sources said they were mostly indexed to oil prices or Henry Hub and since 2023, it has sold more than 10 million mt on the same pricing basis, with sales of the remaining still to be strategized.

Market sources said the company appears averse to increasing its exposure to spot LNG prices further unless it derisks its existing LNG portfolio that has older contracts longer than 10 years.

"TotalEnergies are very long and they're actively working on de-risking their portfolio ahead of the oversupply period in 2027/2028," said a source familiar with long-term contracts in the Middle East.

"So the flex terms are basically a tradeoff based on opportunity cost. Seller retains flex on cargoes, in return for offering a discount on the slope."

By offering flexibilities, TotalEnergies hedges its long-term contract risk and will be able to take advantage of favorable spot prices, especially if spot LNG prices rise above term prices.

For instance, the Platts JKM December delivery was at $13.507/MMBtu on Nov. 13, and JKM calendar year 2027 derivative assessment was at $10.175/MMBtu at Singapore close Nov. 13. These spot prices are higher than a term price of $8.68/MMBtu assuming a 12% slope to Dated Brent price of $72.37/MMBtu.

On the other hand, if spot LNG prices remain below term prices, sellers can rely on contracts as a failsafe. An LNG origination trader in Europe said some companies had concerns that spot gas prices could crash and wanted the safety of oil or Henry hub-linked contracts.

In such a scenario, oil prices are expected around $60-$80/b and JKM spot prices are in the single digits, pushing large portfolio players to be aggressive in the long-term market.