Orlen's exit from QatarEnergy LNG deal may foreshadow other buyer pullbacks: observers

Orlen's decision to terminate a long-term LNG agreement with QatarEnergy amid the major producer's months-long force majeure declaration may presage similar moves by other buyers as the war in the Middle East enters its ninth month, market watchers told Platts Nov. 11, adding, however, that a widespread exodus was unlikely.

"Continued disruption could lead to further terminations, particularly where buyers have alternative supply options or no longer consider their existing contractual commitments commercially tenable," Agnieszka Ason, an energy lawyer and senior research fellow at the Oxford Institute for Energy Studies, said.

Morten Frisch, senior partner at Morten Frisch Consulting, offered a firmer expectation.

"I think we are going to see more Qatari LNG sale and purchase agreements (SPAs) having pricing based on a high percentage Brent slope being canceled over the next few days," he said.

The Polish energy company said late Nov. 10 it was ending one of two long-term LNG deals with Doha, citing "an ongoing force majeure resulting in an inability to meet contractual delivery obligations."

The contract was for 1 million metric tons/year of LNG through 2034.

QatarEnergy declared force majeure on LNG shipments in early March, shortly after the initial US and Israeli strikes on Iran that sparked the ongoing war in the Middle East.

'Good housekeeping'

Market watchers generally interpreted Orlen's decision as a move to get out of a less competitive, oil-indexed agreement, which was inked nearly two decades ago. The long-term contract was priced against Brent, with a 16% slope plus a 50-cent constant, according to S&P Global Energy CERA.

Orlen's other, unchanged contract is gas-linked, it said.

"I see this as good housekeeping on behalf of Orlen," Frisch said.

Poland's PGNiG — now part of Orlen — entered the oil-indexed agreement in 2009 at a time when the former Soviet satellite was "determined" to wean itself off Russian gas, according to Frisch.

"It was totally uneconomical at the time — Russian pipeline gas supplies could be obtained at a lower price," he said. "The Qatari Take-or-Pay and Delivered Ex-Ship LNG sale and purchase agreement was signed based on geopolitical considerations."

Toward the end of this decade, however, global LNG prices are expected to drop as a torrent of long-anticipated new supply hits the market, Frisch explained. So, there was an incentive for Orlen to back out of the oil-linked deal, if possible.

Others with similar terms could follow suit if their agreements allow.

"We could maybe see another couple of companies who are maybe not particularly happy about how much LNG they have got so far and the pricing conditions and also the flexibility conditions in the long-term contracts," said Anne-Sophie Corbeau, a research scholar with Columbia University's Center on Global Energy Policy.

Neither QatarEnergy nor Orlen responded to requests for comment Nov. 11.

Contract terms key

Any further terminations would hinge, in part, on the specific language of each SPA.

It's rare to end long-term SPAs early, but many contracts include termination mechanisms structured around an extended force majeure, according to Ason.

However, those mechanisms vary.

"The contractual thresholds for prolonged force majeure differ across SPAs, and some buyers may need to wait considerably longer before termination becomes available," Ason explained.

Buyers with favorable long-term deals might also opt to preserve their supply guarantees, rather than fend for cargoes in the current, tighter market, she argued.

"I would not expect a wave of terminations," Ason said.

Jason Feer, global head of business intelligence with Poten & Partners, likewise downplayed the prospect of a "big wave" of cancellations.

"The damage already has been done in most cases," he said. "Buyers are coping with higher prices and canceling contracts with Qatar won't change that. So I would think most will try to wait out the situation."

Platts, part of S&P Global Energy, assessed the DES Northwest Europe LNG benchmark at $27.585/million British thermal unit Nov. 11. The spot index is 175% higher than the same time last year.