Brent-linked long term LNG contracts return

Thursday, 25 May 2023
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Long-term LNG contracting activity has got off to a strong start this year, with around 13 mill tonnes per annum agreed in just over four months. 

Speaking on the sidelines of the Australian Petroleum Production and Exploration Association (APPEA) Conference in Adelaide, Daniel Toleman, Wood Mackenzie’s Principal Analyst for Global LNG, said that the bullish conditions in the market have continued.

“In 2022, the volume of long-term LNG contracts signed returned to its highest level since 2012, with 81 mill tonnes per annum of new LNG SPAs (sales purchase agreements) and HOAs (head of agreements) signed,” Toleman said, continuing; “This momentum has continued into 2023.”

Since December of last year, several Omani LNG deals have been signed. These contracts will replace existing contracts, which expire in 2025.

Omani buyers include Japanese utilities, oil majors, a Southeast Asian buyer, a Turkish buyer, and the trading arm of a Chinese national oil company. These deals signal the return of Japanese buyers to long term contracting, Toleman said.

The deals’ duration range from four to 10 years. Overall, more than 90% of last year’s contracts were for 15 years or longer but the Omani deals are shorter, partly because the plant is already onstream and partly because Omani gas reserves beyond this date have not been fully proved.

Brent pricing continues to rise. Between 2020 and early 2021, long-term oil-linked contract prices fell into the 10% range, levels not seen in the last 10 years. This was driven by Qatar opting for a market share strategy.

Qatar is now asking for deals above 12.5% of Brent. These deals have limited flexibility, and seasonality and are fixed to a market so the slope of a ‘normal’ cargo is higher, between 13-15%.

For example, the 27 year Qatar/Sinopec deal starting in 2026, is rumoured to have a slope of above 12.75% with limited flexibility. Woodmac believed that most of the deals from Oman LNG, which have more flexibility, have been signed in the mid-to-high 13%s for FOB and low to mid 14%s for DES.

Prices vary

However, prices vary greatly based on the terms, tenure and start date of new deals. The market remains bifurcated with contracts starting before or after 2026, attracting premiums or discounts to this range, respectively.

Recent mid-term deals reportedly signed by Chugoku Electric also support this, Woodmac said. The deals start in mid-2023 for seven to eight year terms and have pricing above oil parity before the end of 2025, reducing to the low 13%s beyond.

There have also been a number of three year contracts that commenced early this year. These deals have been signed in the 17%s. In addition, a number of price reviews have also been agreed during the past six months. These contracts have been signed for the period 2023/7, on an FOB basis, in the low-to-mid 13%s.

Toleman added that Woodmac expected further deals to be announced in the coming months, with additional contracts from Qatar's projects. Oman LNG may also announce new deals, as all of the contracts in place are set to expire in 2025/2026, as mentioned.

Thus far, OLNG has only re-contracted half of the capacity - 6 mill tonnes per annum - from its project. Recently, it was reported that China National Petroleum Corp (CNPC) was close to finalising a deal with Qatar Energy to offtake LNG for around 30 years.

Woodmac explained that Brent pricing in LNG works by linking LNG prices to the Brent benchmark oil price. This means that if a long-term LNG contract is 13% of the Brent benchmark, the price per MMBtu is 13% of the Brent oil price at the time of the agreement. 

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