Asian LNG buyers are showing an increasing preference for shorter tenures in term contracts, but long-term contracting remains a necessity despite increased spot liquidity, according to executives at the 7th China LNG & Gas International Summit this week.
“In the earliest stage of the LNG market, we’ve seen more of 20-25-year long-term contracts, but now requirements have changed, and some are saying they prefer 3-5-year contracts. Of course, there are still some Chinese buyers requesting 5-10-year tenures to ensure stability in supplies for their basic domestic demand,” Ma Shenyuan, Tellurian’s senior advisor, said.
“When I say long-term… we used to call long-term 20 years, now long-term is 10 years, and indeed soon it will be five years… what we see in [North Asia] and India is more and more tenders are having a medium term like five years, but that already gives some stability,” TotalEnergies China’s vice president, LNG, Denis Bonhomme, said on a separate panel.
Spot indexing reduces LTC take-or-pay risk
“A huge risk in term contracting is the take-or-pay clause, but the usage of JKM reduces this risk significantly … the price difference between a term and spot cargo would not be big if JKM is used. But if crude oil or Henry Hub indices are used, the price risk will be amplified as there is little correlation with the market price,” Ma said.
He also highlighted the importance of the usage of spot LNG market pricing — the Platts Japan Korea Marker — in long-term contracts to reflect fundamentals in the Asian market and to improve risk management needs of customers.
“Currently, the contracts that are linked to crude oil or Henry Hub prices aren’t able to fully reflect the market price in Asia or China. While China is working on its own LNG index, with the absence of that, JKM is the closest index for the Chinese market,” he said.
Recently, Gunvor and Vitol had agreed to medium-term deals to buy 3 million mt/year each from Tellurian’s proposed Driftwood LNG export terminal in Louisiana, Tellurian said May 27 and June 3 separately. Both deals cover a 10-year period, with the supply indexed to a combination of the Platts JKM and Dutch TTF, netted back for transportation charges.
Term contracts still necessary
Tellurian’s Vice Chairman Martin Houston said about the LNG spot market, “It has matured to a point where consumers can rely on the market to fulfill a significant portion of their LNG needs. They may have some price risk, but they no longer have to take volume risk or term risk, as they did in the past.”
Despite increased spot liquidity in the LNG market, TotalEnergies China’s Denis Bonhomme said that long-term contracts remain a necessity to Chinese LNG buyers for the stability of supplies.
“We’re all seeing the return of long-term contracts … having a very diversified portfolio both of sources and of indexations makes a lot of sense, and the best way for this is to have long-term contracts,” he said.
In relation to the recent power shortages in the Guangdong province, he said “having a sustainable secure source of supply is very important, especially for a fast-growing market like China … and this can only come through medium- or long-term contracts.”
Meanwhile, a shorter supply/demand cycle in the LNG market could pose difficulties in predicting long-term market fundamentals, Wu Yifeng, general manager of PetroChina International’s natural gas department, said.
“Technological advancements and recent developments at projects like Arctic 2 have shortened the construction duration significantly, which has also reduced the supply/demand cycle … Personally, I’d suggest we do not make predictions beyond 10 years, it would be more realistic to monitor supply/demand fundamentals 2-3 years ahead,” he added.
Source: Platts