LNG Contracts With No End in Sight Spur Buyers to Renegotiate

For LNG buyers, 2040 is beginning to feel even further away.

Just a few years ago, faced with limited supply and relentless demand growth, liquefied natural gas

buyers were happy to lock in contracts that ran through nearly the middle of the century, often

paying prices linked to the cost of oil. Now, as the market moves deeper into oversupply, being tied

to a producer for the next two decades is shifting from a blessing to a curse.

Less than 15 percent of long-term LNG supply contracts will expire in the next five years, according

to data compiled by Bloomberg. Meanwhile, new projects in Australia and the U.S. are saturating the

world with LNG, depressing spot prices 33 percent this year in Asia’s energy trading hub of

Singapore, even as oil has risen about 20 percent. That’s giving buyers the incentive to try to

renegotiate their deals with suppliers, according to analysts at Citigroup Inc. and Energy Aspects Ltd.

“Serious tensions will be seen in the market when oil starts transitioning to higher levels, driving

contracted gas prices upwards,” Trevor Sikorski, an analyst with Energy Aspects in London, said by e-

mail. “At the same time, the LNG spot market should stay low — and that wider gap between the two

prices will mean a number of buyers unhappy with that spread and this will drive calls for

renegotiation.”

Buyers Emboldened

Petronet LNG Ltd. in December renegotiated its deal with Qatar’s RasGas Co., resulting in a drop by

more than half of the price the Indian importer was paying. China National Petroleum Corp. wants

new prices in its deal with Qatar, Chairman Wang Yilin said in March. Cnooc Ltd. Vice President Li Hui

said last month the company is negotiating within its existing contract with Royal Dutch Shell Plc’s

BG Group unit for 8.6 million tons of LNG a year.

Petronet’s negotiations allowed it to drop the price it’s paying for LNG to less than $5 per million

British thermal unit, Oil Minister Dharmendra Pradhan said last week. The price was about $13 last

year. In return, Petronet agreed to increase it’s purchases from Qatar.

“For India, achieving a low LNG import price at less than $5 per million Btu, based on prevailing oil

prices through contract renegotiation, should embolden other parties to press for similar or even

better terms,” Citigroup analysts including Ed Morse said in a research note Thursday. “Indeed, Asian

buyers appear to be waiting for LNG sellers to acquiesce amid the looming oversupply.”

Breaking the Oil Link

About two-thirds of 160 long-term contracts with known commercial terms are linked to oil prices,

according to data compiled by Bloomberg. That includes deals signed in 2009 in which Osaka Gas Co.

Ltd and Chubu Electric Power Co. Inc. agreed to pay Chevron Corp. for LNG from the Gorgon project

in northwest Australia based on Japanese crude import costs through 2040.

Buyers will try to change the basis of their deals from an oil-based index to a natural gas index such

as Henry Hub in the U.S. to protect against an expected divergence in oil and gas prices, Sikorski said.

The crash in energy prices has made other hedging options more affordable, said Melissa Stark,

energy managing director and global LNG lead at Accenture. Importers can invest in midstream

assets, like shipping and storage, or even buy stakes in U.S. shale projects and fields.

“There are more options for buyers,” Stark said by e-mail. “But with these options come more

complexity, the need for trading and risk management capability.”

As some long-term contracts end, buyers will be looking to enter deals that are shorter in duration

and smaller in volume, Gautam Sudhakar, IHS Inc.’s director of global LNG, said by e-mail. Projects

that supply LNG for these expiring contracts are typically older and have paid off debts, so they will

be able to add supply at competitive prices to the spot and short-term markets, he said.

NGS INDIA