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Dilemmas in LNG term deals amid higher Henry Hub forward curves

Highlights

Henry Hub to reach $4-$5/MMBtu over 2027-28

Brent oil-linked contract prices less appealing

Buyers target lower slopes with Henry Hub linkage

  • Author
  • Melody Li    Margaret Rogers
  • Editor
  • Sivassanggari Tamil selvam
  • Commodity
  • Crude Oil LNG Natural Gas Upstream

As international LNG prices show signs of stabilizing following market fluctuations triggered by tensions between Russia and Ukraine, coupled with several contracts nearing expiration around 2024 and 2025, Asian buyers have initiated negotiations for long-term contracts, or LTCs, since the beginning of 2024.

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According to market data, approximately ten LTCs have been signed since January 2024, with three or more involving Henry Hub linkage.

Several market sources indicated that Asian buyers signing contracts based on DES (delivered ex-ship) terms linked to Henry Hub have negotiated contract slopes ranging between 119% and 121%. The pricing mechanism includes a constant factor to cover liquefaction and freight costs, estimated to be around $4.5/MMBtu, partially tied to the consumer price index.

Brent oil linkage losing price edge

Since January 2024, JKM prices have fallen below Brent oil-linked LTC prices. This price disparity has sparked discussions in the market about renegotiating term contracts that were agreed upon over 2022-23 but have not yet been finalized into sales and purchase agreements.

As buyers become increasingly aware that LNG market fundamentals are not necessarily aligned with global crude oil prices -- which are more susceptible to geopolitical risks -- there is a growing interest in diversifying price exposure. Consequently, buyers are considering signing more contracts with non-Brent oil linkages.

"We have a higher price exposure to Brent oil linkage due to many existing contracts being linked to Brent oil. Therefore, we might want to consider signing LTCs linked to Henry Hub to diversify risk," a Chinese importer said.

"Henry Hub-linked contract prices are currently more competitive than Brent oil-linked contract prices, as oil prices are expected to rise due to geopolitical tensions; therefore, Henry Hub and JKM prices are more favorable to buyers," a Korean end-user added.

Henry Hub linkage price risk

However, there are lingering concerns regarding the price risk associated with Henry Hub linkage in LTCs. The forward curve published by CME indicates Henry Hub prices could surpass $4/MMBtu in 2027, coinciding with the anticipated arrival of new supplies from both the US and Qatar.

This influx of supply has the potential to exert downward pressure on international spot prices in the LNG market, rendering Henry Hub-linked contract prices uncompetitive compared with spot prices in 2027 and beyond, several Asian trade sources said.

According to sources working in Chinese companies, there is an offer for LTC at a 120% Henry Hub slope plus a constant cost of $4/MMBtu, which many buyers find attractive for terms starting in 2025-26. Industry players said negotiating a Henry Hub slope substantially lower than 120% for contracts beginning in 2025-26 is unlikely. However, the constant factor has decreased from $4.5/MMBtu to $4/MMBtu on average, reflecting anticipated weaker freight costs going forward.

"Given the tolling fee for natural gas remains in the $2 range for US liquefaction, there would not be much room for profit if sellers committed to delivering cargoes consistently at $4-$4.50," a European trade source said.

However, industry sources noted a gambling element involved in Henry Hub-linked LTCs, as Henry Hub prices reflect the market dynamics of the US gas sector rather than international LNG fundamentals.

International spot LNG prices would become more appealing than Henry Hub-linked contract prices if US gas demand were to eventually drive up Henry Hub prices to $4-$5/MMBtu in 2027 with lower shale gas supply, which is equivalent to importing a spot cargo at $8.8-$10/MMBtu using the mentioned pricing mechanism, the sources said.

Industry players reported that cancelation could pose significant challenges and expenses, as buyers would be responsible for covering the sunk costs associated with liquefaction and freight, which form the constant portion of the pricing mechanism.

"Even if Henry Hub prices reach $5/MMBtu, Henry Hub-linked prices would still be cheaper than Brent oil-linked contract prices, with the forecast price for Brent oil at $80/bbl and the potential contract slope at around 12%; meanwhile, negotiating a lower slope for Henry Hub linkage or more flexible cancelation options could help offset the risk of higher Henry Hub prices in the future," an Asian importer said.

Nevertheless, buyers in Southeast Asia have expressed concerns about the possibility of Henry Hub prices exceeding $5/MMBtu in the future. This could potentially make spot cargo prices against JKM more economically favorable compared with long-term supply contracts linked to Henry Hub pricing.

The Platts JKM -- the benchmark price reflecting LNG delivered to Northeast Asia -- averaged $9.498/MMBtu between January and April 2024, declining 38.14% compared with the same period last year. As of May 10, Platts assessed JKM at $10.814/MMBtu, decreasing 15.45% compared with six months ago, but increasing 3% on the year, S&P Global Commodity Insights data showed.

Hybrid pricing basis

"Given our projections for future demand coverage, there is a keen interest in spreading out price risks with a combination of Brent oil, Henry Hub and JKM linkages for new term contracts," a Korean procurement manager said.

European sources also remarked that Asia is keen on broadening its contracts to include a mix of Henry Hub, Brent oil and JKM linkages.