Demand for long-term LNG contracts continues to gain momentum, says WoodMac

Demand for long-term LNG contracts continues to gain momentum, says WoodMac
-A +A

KUALA LUMPUR (May 17): Demand for long-term LNG contracts continues to gain momentum this year as large volumes have been signed and prices for oil-linked deals under negotiation are rising, said energy research and consultancy Wood Mackenzie (WoodMac).

In a report on Monday (May 16), the firm said long-term contracting is off to a fast start this year with more than 10 million tonnes per annum (mmtpa) signed to end-market users.

It said in 2021, the volume of long-term LNG contracts signed to end-user markets returned to its highest level in the last five years.

It said this momentum continues into 2022.

WoodMac principal analyst Daniel Toleman said the Russian invasion of Ukraine has had a dramatic impact on long-term LNG contracts.

“Many traditional LNG buyers will neither procure spot gas or LNG nor renew or sign additional LNG contracts with Russian sellers.

“Spot prices have also been high and volatile, pushing many buyers towards long-term contracts.

“Additionally, some buyers are returning to long-term contracting on behalf of governments to protect national energy security,” he said.

WoodMac said the result is rising prices for long-term oil-linked contracts under negotiation.

It said between 2020 and early 2021, long-term oil-linked contract prices fell into the 10% range, levels not seen in the last 10 years.

The firm said this was driven by Qatar opting for a market share strategy, other sellers having long uncontracted positions and Japanese legacy buyers being out of the market for long-term volumes.

Toleman said the Russian invasion of Ukraine has pushed prices higher.

He said Middle East sellers are now asking for deals above 12%, adding that these deals have limited flexibility, seasonality and are fixed to a market so the slope of a ‘normal’ contract is higher, between 12.5% and 14%.

“There has been news about sellers wanting 16% or 17% for 10 years, but we have not been able to substantiate this.

“Short-term deals can attract these rates. We believe that sellers can get 16% slopes for two- or three-year deals with volumes ending before the end of 2024.

“The range is slightly lower at 14-15% for four- or five-year deals with volumes that end in 2026,” he said.

Meanwhile, WoodMac said Chinese buyers continue to dominate the market, signing more than eight mmpta of new LNG sale and purchase agreements this year.

It said most new contracts are from US supply as operators move projects forward, highlighting that all these contracts are linked to North American prices.

The firm said Chinese buyers have also continued their strategy of procuring low-priced LNG, explaining that in 2020 and early 2021, they targeted oil-linked Qatar volumes.

It said that since mid-2021, Chinese buyers have targeted Henry Hub deals with liquefaction tariffs below US$2 per million British thermal unit (mmbtu).