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Global LNG contracting rush leaves Asian importers in tight spot

A resurgence in LNG contracting is expected to result in many more deals being signed in the coming months as LNG importers in Asia and Europe, portfolio players and trading houses look to lock in long-term LNG prices before they start to rise again.

Asian LNG importers are seeking the protection of long-term contracts due to the volatility of spot markets, while European energy companies and utilities are looking to tie up gas supply to replace Russian volumes in the years ahead.

The market has decidedly moved in favor of LNG sellers. The narrative being pushed by LNG producers, both US LNG exporters and oil-linked producers like the Middle East, is that if Asian buyers do not lock in volumes in the next few months for post-2025 supply, they will lose out to Europe.

Some deals between South Korean importers and US LNG suppliers were announced at the World Gas Conference 2022 in Daegu last month, but several more purchases by Asian firms have not been made public. Counterparties are in various stages of negotiating more sale and purchase agreements, both new deals as well as old ones that are being finalized and which are likely to materialize in the coming months.

Japan's gas buyers are being driven by the need to switch out Russian volumes and expiring contracts, Chinese firms are covering spot exposure and securing demand from new LNG terminals, Indian companies need affordable gas to replace spot imports and some Southeast Asian firms are looking to enter the gas market for the first time.

Keeping natural gas prices low and affordable will be key to creating new demand and ensuring the role of gas in decarbonization, several executives said at the recent World Gas Conference in South Korea

Long-term prices

European buyers are hesitant to lock-in firm 20-year SPAs. Their gas requirement is focused in the short- to medium-term, with an eye on accelerating their switch to renewables in the long-term. They are worried both about the impact of gas on net-zero goals and whether they will even need large volumes of gas for longer than 10 years.

Portfolio players and traders have proposed to step in and assume the volume risk in long-term deals by shifting supply to Asia, but they are likely to demand much lower prices and price slopes than are being offered.

Meanwhile, pricing for long-term contracts appear to be on the rise.

So far, US LNG projects linked to Henry Hub, which have some of the largest LNG expansion capacity to bring onstream from 2025 onward, have benefited the most and signed the most number of SPAs with Asian buyers.

The flexibility and optimality of US LNG cargoes, geographical diversification and the competitiveness of Henry Hub-based prices compared to both oil-indexed and spot LNG in the current market are working strongly in their favor.

Graph: LNG price formation has evolved rapidly in recent months

While US project developers are just happy to be in a sweet spot, Qatar and other oil-linked LNG sellers are making the most of their strong negotiating position and are pushing hard for higher price slopes.

Offers in the market are in the vicinity of 15% Dated Brent, although no deals have been made public at these record levels.

Although US LNG prices may have set the price floor for long-term contracts, assuming oil and spot LNG prices remain high, traditional producers like Qatar and Australia still enjoy a distinct shipping advantage and supply certainty at a time when energy security is paramount.

Spot vs long-term

Any Asian buyer looking for short-term contracts before 2024-2025 is in a precarious situation. Southeast Asian utilities said they had been offered one-year contracts at slopes of as much as 25% Dated Brent for the next couple of years, much higher than their pain threshold of around $15/MMBtu.

Several executives admitted they were unsure how long the market will remain in favor of producers and argued that keeping natural gas prices low and affordable was key to creating new demand and ensuring the role of gas in decarbonization.

A sustained period of $20/MMBtu LNG will either incentivize the energy transition to renewables, or a reverse fuel switching to coal, depending on the policy framework of local economies.

LNG markets had to eventually tighten as part of the traditional commodity cycle after several years of rock-bottom LNG prices that even saw cargo cancellations to balance supply. The Ukraine crisis has only served to speed up the upward price trajectory to peak price levels, several long-term market observers pointed out.

With the number of liquefaction projects going into FID and the amount of new LNG production expected post-2025, the market is quite likely to slip into another period of low spot prices and high LNG supply, exacerbated by the shift to renewables.

This leaves importers with the age-old predicament: if a country has to introduce gas into the energy mix or a utility is planning a large wave of gas-fired power generation after 2025, should it lock in an SPA in the current market or just wait till prices fall again?