The long-term LNG contract is back. Buyers of liquefied natural gas in Europe and Asia are increasingly committing to long-term purchase agreements, unlike in the past few years when spot contracts gained a significant market share as customers sought flexibility in delivery clauses and lower prices than the oil-linked prices in the long-term deals. Buyers, especially in Asia, frequently took advantage of spot cargo deliveries to replenish their stocks ahead of the winter heating season.
This year everything changed in the energy market after Russia invaded Ukraine.
The war in Ukraine and Europe's now irreversible pledge to eliminate dependence on Russian pipeline gas sparked energy security concerns globally and a rush to spot contracting that sent spot LNG cargo prices to record highs.
Buyers returned to long-term contracts in order to secure long-term supply of non-Russian gas and to insulate themselves from spiking volatile spot prices. In just a few months, the global LNG market turned from a buyer's market to a seller's market, with LNG suppliers commanding a tight market as buyers scramble to secure gas from providers other than Russia.
Europe's race to fill gas inventories ahead of next winter amid high uncertainty over whether—or rather when—Russia would cut off gas deliveries to more buyers in Europe, priced out the more-sensitive spot buyers in Asia, while Europe is politically motivated to procure more LNG supply.
The Return Of The Long-Term Contract
Several deals for long-term LNG supply were announced this week alone. Buyers in both Europe and Asia have announced a flurry of such contracts in recent weeks, mostly with U.S. sellers, which actually need long-term commitments for their supply in order to secure financing and proceed with the many projects for new LNG export terminals.
Just yesterday, Venture Global LNG announced a final investment decision (FID) and successful closing of the $13.2 billion project financing for the initial phase of its Plaquemines LNG export facility and the associated Gator Express pipeline—the largest project financing in the world closed so far this year. In addition, the company has executed 20-year Sales and Purchase Agreements for 80% of the full 20.0 MTPA project.
TotalEnergies signed on Tuesday a deal with South Korea's Hanwha Energy Corporation for the supply of 600,000 metric tons of LNG per year over 15 years, starting in 2024.
"It is significant that we have secured business stability by signing a long-term contract with our long-lasting partner TotalEnergies, even though the volatility of the LNG market has increased more than ever due to the recent unstable international situation," said Hanwha Energy CEO Jung In Sub.
Top U.S. LNG exporter Cheniere Energy announced on Wednesday a 20-year deal with POSCO Holdings, South Korea's largest steelmaker and owner of the country's first private LNG terminal. Cheniere will supply LNG starting in late 2026 on a free-on-board basis, with the purchase price for LNG indexed to the Henry Hub price, plus a fixed liquefaction fee. The deal is subject to Cheniere making a positive final investment decision to construct the Corpus Christi Stage III Project, expected this summer.
On the same day, Sempra Infrastructure signed a heads of agreement with Germany's RWE for the long-term supply of LNG on a free-on-board basis from the Port Arthur LNG Phase 1 project under development in Jefferson County, Texas.
"Our partnership can contribute largely to securing significant LNG volumes for the RWE portfolio on a long-term basis while building the basis for supplying low carbon gas in the future," said Andree Stracke, CEO of RWE Supply & Trading.
In the most curious about-face showing how energy security and Europe's drive to break free from Russian gas dependence have upended the LNG market, France's Engie—which had abandoned talks on an LNG deal with U.S. NextDecade in 2020 due to environmental concerns—signed this month a preliminary 15-year deal with the same firm for supply from the Rio Grande LNG export project in Brownsville, Texas. Assuming the achievement of further LNG contracting and financing, NextDecade expects to make a positive FID on at least two trains of Rio Grande LNG in the second half of 2022.
Long-Term Deals Gain Momentum
Following the highest level of long-term LNG contracting in five years in 2021, demand for long-term LNG deals continues to gain momentum this year as large volumes have been signed and prices for oil-linked deals under negotiation are rising, Wood Mackenzie said in a report last week.
"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," Wood Mackenzie principal analyst Daniel Toleman said. "Additionally, some buyers are returning to long-term contracting on behalf of governments to protect national energy security."
In early May, Sempra Infrastructure's chief executive Justin Bird said that the market is seeing a dramatic shift toward long-term contracting.
"There has been a dramatic shift in the market in the recent days. Specifically, we've seen a significant amount of long-term contracts," Bird said on Sempra Infrastructure's Q1 earnings call.
"So yes, you are seeing a lot of parties, given the volatility in both TTF and JKM. And frankly, the high forwards, you're seeing a definite renewed interest in parties willing to go long term. And those are the conversations that we are having."
By Tsvetana Paraskova for Oilprice.com
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