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LNG buyers call for more delivery flexibility to manage supply glut

Singapore — Calls for increased contract flexibility dominated discussions at the fourth annual LNG Producer-Consumer Conference in Tokyo this week, as industry participants met once again to deliberate emerging trends in the LNG market.

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The debate advanced some from a year ago, when price indexation had largely taken center stage. With some flexibility now granted in this area, the focus of discussions increasingly turned to the still-restrictive terms around LNG delivery schedules and destinations.

Numerous industry observers saw the removal of destination clauses, take-or-pay terms and the use of more upward and downward quantity tolerance in contracts as the key components that will be necessary to manage the looming supply glut in LNG.

"LNG producers must improve on the contract practices of the past. Simply put, producers need to help increase the flexibility of the trade," said Jae-do Moon, South Korea's vice minister for trade, industry and energy.


"[Buyers] face difficulties in managing supply as the demand decreases. In this regard, I am sure more flexible take-or-pay or destination clauses will go a long way to increasing the trade," he said.

"We need to take recent changes in the market as a chance to do away with the destination clause once and for all. The result will be a fairer and sounder LNG trading relationship for all parties."

Jean-Pierre Mateille, Total Gas & Power's vice president for trading, conceded that changes around delivery and schedule terms in contracts were inevitable. But he cited the need for suppliers to remain competitive against the wave of imports from the US as the driving factor.

"Contracts are becoming shorter. The US is FOB -- so you have that flexibility of destination, and we see the traditional link between producer of gas and buyer of LNG has been broken up by this new business model. The contractual terms are changing," Mateille said.

Satoshi Kusakabe, commissioner of Japan METI's Natural Resources and Energy Agency, said that more broadly, the removal of destination clauses would aid the development of the LNG market because it would draw more players and increase liquidity and spot trades.

International Energy Agency Executive Director Fatih Birol said: "For LNG to achieve its potential, we need well-functioning markets. These do not emerge automatically. Progress will be required -- less government intervention, less regulated gas prices and more access to networks."

TERM NEGOTIATIONS STALL

Although traditional LNG suppliers were tight-lipped on how much ground, if any, they were prepared to concede around cargo deliveries, it is clear that similar calls for increased flexibility around pricing indexes that had dominated the same conference last year are now being met, at least in part.

"There's no doubt that different contract arrangements are being experimented with, as buyers look to manage risk and uncertainty. These include tolling, non-source-specific portfolio sales, variations on price indexation and more short-term sales," said Robert Franklin, president of ExxonMobil Gas & Power Marketing.

But this alone appears to have done little to entice buyers back to negotiation tables for long-term contract volumes.

Most remain reluctant to lock in volumes further down the curve in the current low oil price environment as both demand projections and the development of the wider LNG market are murky.

In the case of Japan, LNG imports are actually expected to fall to 62 million mt/year by 2030 from the current 90 million mt/year, according to the Ministry of Economy, Trade and Industry, as the country looks to reduce its reliance on carbon fuel.

The lack of new projects sanctioned has prompted sellers to caution buyers that shortages are looming unless they act soon.

"There will be a supply overhang between now and 2025, but that gap looks like it is tightening as we see economic recovery and projects face delays," said Demus King, general manager of the Offshore Resources Branch of Australia's Department of Industry and Science.

"Even at the current projections, we need to add about 20 million mt of LNG per year to maintain a stable supply demand balance [from 2023 onward]," King said.

"To deliver in 2023, FIDs need to be made in the next few years. Every year after that, FIDs need to be made to support the additional 20 million mt/year to maintain a comfortable demand supply balance.

"We risk a deeper supply/demand cycle, where high prices result in demand destruction, and low prices result in a lack of investment."

Exxon's Franklin said securing new FIDs in the current environment would not be easy, and this could remain the case as more supply capacity comes on stream.

The IEA's Birol also cautioned the growing risks of "short term-ism" in the LNG market, which could become more costly in the long term.

"There is no doubt that a golden age of gas remains possible," he said. "In the US, it's already a reality. In this part of the world, we need to move faster and with more determination."

--Stephanie Wilson, stephanie.wilson@platts.com
--Edited by Meghan Gordon, meghan.gordon@platts.com