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Global LNG supply growth to foster spot market, challenge new commercial deals

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Global LNG supply growth to foster spot market, challenge new commercial deals

The continued build-out of the U.S. LNG export complex is expected to keep a lid on international gas prices and require project developers and gas sellers to stay nimble in an evolving marketplace to be successful.

A recent outlook from S&P Global Platts Analytics found that U.S. LNG export volumes will rise from approximately 7.6 Bcf/d in December to 12.2 Bcf/d a year from now. That would be a build of 60%, on top of the 65% increase over the last year. Those new supplies will test the market’s ability to consume it.

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Pressuring traditional market fundamentals will be the likelihood that final investment decisions on additional global production capacity could increasingly move ahead without being connected to long-term contracts with end-users.

"The size of the LNG spot market is growing and the price of a spot LNG cargo is lowering," Katie Bays, an energy analyst and co-founder of research and consulting firm Sandhill Strategy, said in a recent interview. "That's a typical example of an oversupply environment. And an oversupply environment is a tough environment for commercial commitments, which is what independent projects need."

Like Bays, Tudor Pickering Holt & Co. analysts said a growing spot market will disincentivize contracting, which will result in LNG contracts becoming shorter and more flexible on volume, price and destination. As evidence of the dynamic, the analysts at the energy investment bank said a spate of final investment decisions by deep-pocketed backers who can weather market turmoil exemplified the "changing of the guard," and the difficulty of securing long-term contracts.

A market transition from demand-pull to supply-push dynamics shifts risk from the buyer to the seller. Loose market conditions spurred speculation in 2019 about potential curtailments of U.S. LNG production at existing facilities.

"The market is going to be loose again, and there is no really good reason, absent some kind of major policy intervention, why 2020 will be a significantly different year than 2019," Bays said.

Over the next few years, the expiration of existing long-term contracts with Asian buyers that support legacy projects around the world could also impact the supply picture. In new deals, buyers are seeking shorter, more flexible terms, and some are reportedly looking for exit clauses in case the market changes dramatically during the contract term.

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In 20-year contracts, it is not uncommon for there to be a so-called "price reopener" clause. That clause would allow the parties to renegotiate the price every five years to get closer to the market rate at that time if the contract rate is widely out of alignment, said Meg Gentle, CEO of Driftwood LNG developer Tellurian Inc. and a former marketing chief at Cheniere Energy Inc. The clause makes it more important for developers to be nimble and consider alternative business models, in trying to balance supply and demand, Gentle said.

"We'll manage our marketing book tightly on a five-year forward-looking basis," Gentle said. "So, there's no need for a walkaway clause. Whatever term you want, that's what we'll do."

The outlook for low U.S. gas prices may be the key to U.S. export builders' confidence. Prices in the U.S. are forecast to stay under $3/MMBtu for several years.

"As long as we can be competitive out of the U.S. as it relates to our feedstock, I would be surprised to see a massive disruption in the U.S. industry," said Omar Khayum, CEO of Annova LNG, an Exelon Corp.-backed export project being developed in Brownsville, Texas.

Harry Weber is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.