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Buyers faced with unprecedented choice, flexibility

Transforming project financing, market access

Price transparency key to full commoditized market

Brussels — Flexible US LNG contracts are helping to create a global, commoditized spot market and transforming project financing models, according to US oil and gas trade body the American Petroleum Institute.

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The US could become the world's third largest LNG exporter by the end of this year, after Qatar and Australia, and is bringing "unprecedented" options for pricing and contract terms to the market, API policy officer Dustin Meyer told S&P Global Platts in an interview Monday.

"The beauty of US LNG is that no one really knows how it will be priced, and that's a unique amount of flexibility, of optionality, for potential buyers," he said.

For decades LNG buyers "really only had one option" for pricing -- linking to Brent oil.

The first wave of US LNG export projects, which are coming online now, generally used prices linked to the US Henry Hub.

Developers for the second wave, who are looking to sign contracts now, are being more flexible to attract buyers. There are many options, including hybrid approaches where prices are linked partly to Henry Hub, and partly to a European hub price, such as the Dutch TTF or UK NBP.

"Maybe you can mix in a bit of Brent oil. Maybe you go all Brent oil," Meyer said.

Some developers have even offered a bit of linkage to the West Texan hubs where prices can be very low or even negative because there are no links to the coast yet to enable surplus gas to be exported.

"It's really an unprecedented amount of innovation that ultimately benefits the buyer," he said.

Prices becoming more transparent Meyer sees a trend toward more price transparency in the US as well as Asia and Europe.

"That makes project development a lot easier. It's a sign of the maturing nature of the LNG market, as it moves closer to commoditization," he said.

"The more you get to a spot-based market, the more comfortable financial backers are taking a risk on new export projects, which makes it more likely additional capacity comes online," he said.

New projects still benefit greatly from having long-term contracts to get them to a final investment decision, however.

"If you're a new company and you're only focused on one LNG project in the US, then it's going to be more difficult to get financing unless you have those bankable long-term contracts," he said.

"So you're still going to see long-term contracts being signed, but they could be for 12 or 15 years, as well as for 20," he said.

Long-term contracts do not restrict the rise in spot sales, though, as the cargoes can still be sold on a flexible, spot basis by the original buyer.

"That's what we see happening, because there are no destination clauses attached to US LNG," Meyer said.

Trading houses Trafigura and Gunvor, for example, have been able to enter the market because the increase in flexible US LNG cargoes makes it easier to trade in the spot market.

"There's absolutely no obligation for what you do when you pick up your US LNG cargo, and that's different from how LNG projects used to be developed," he said.

A growing LNG spot market with more transparent prices also benefits new customers who might not have the credit to sign a long-term contract, or build a dedicated import terminal.

It helps lower these barriers to entry, and gives people the freedom to respond to market conditions and add LNG to their portfolios, he said.

Prices not politicians drive flows Meyer was circumspect about the European Commission's hopes that the US could eventually become "the major supplier" to Europe, however.

"There's no direct way that the EU or national governments can cooperate with the US government in a commercial way to require a certain percentage or volume of US LNG to go to Europe," he said.

US LNG flows to Europe have surged in the last two quarters as a narrow price spread with Asian LNG made Europe often the most profitable destination.

By early May this year Europe had imported 4.4 Bcm of LNG from the US, already more than the 4.3 Bcm it imported in the whole of 2018, according to data from S&P Global Platts Analytics.

"Governments can be lauded for not creating any obstacles to that, but flows must be left to commercial decisions based on market conditions," Meyer said.

Europe's US LNG imports are also still tiny compared with its major supplier Russia, which sent 200 Bcm of pipeline gas and 10 Bcm of LNG to Europe in 2018.

By early May Europe had imported 6.6 Bcm of Russian LNG -- more than from the US -- as well as 37 Bcm of pipeline gas, the Platts Analytics data showed.

See the big picture on US LNG to Europe in this infographic: http://plts.co/9aYv50u4Fkc and listen to S&P Global Platts editors discussing the prospects for JKM-style price for LNG in Europe here: http://plts.co/NuCO30oJ9aA

--Siobhan Hall, siobhan.hall@spglobal.com

--Edited by Jonathan Dart, newsdesk@spglobal.com