Unlike Chinese buyers, European utilities are unwilling to agree 25-year-plus LNG offtake deals due to rapid renewables deployment. Shell consequently started to offer contracts with ‘break clauses’ – albeit for a higher price – allowing changes to contract terms and destination midway through the deal.
Analysts warned unless Europe sees natural gas as a destination fuel, it will pay dearly for it at spot markets. Qatar typically wants to seal contracts with a term of 25 years or more and recently signed two mega deals with Chinese buyers over nearly 30 years. In contrast, German buyers are only looking for a term of 10 to 15 years due to the country’s commitment to shift to clean energy sources to reduce emissions. To resolve the issue, Qatar offered Germany LNG supply contracts with a shorter duration but a hefty price premium.
QatarEnergy is about to sell large quantities to CNPC over nearly 30 years, while Sinopec achieved favourable terms for offtaking 4 million tons of LNG of LNG from Qatar’s North Field expansion over 27 years, insulating China from gas price volatility as its economy recovers.
“Long-term deals are important for both seller and buyer," QatarEnergy chief Saad al-Kaabi said with reference to the Sinopec offtake SPA that will last into the 2050s. The North Field Expansion includes plans for six new LNG trains that will cost Qatar and partners nearly $30 billion – hence long-term offtake is vital to guarantee a stable rate of return.
Europe’s drive to accelerate the green energy transition, however, lowers visibility on long-term gas demand as low-cost renewables increasingly reduce the dispatch of gas-fired power plants. Large portfolio players like Shell are hence opening up to signing supply contracts with several ‘break clauses,’ for example after three, five or ten years when buyers can alter offtake terms, volumes and the destination of LNG cargo deliveries. This allows smaller utility buyers to adapt their gas offtake, though they have to pay for that extra flexibility.
