WoodMac: 2022 LNG contracting off to quick start

Demand for long-term LNG contracts continues to gain momentum this year as large volumes have been signed and prices for oil-linked deals under negotiation are rising, according to a recent LNG contract trends report by Wood Mackenzie.

In 2021, the volume of long-term LNG contracts signed to end-user markets returned to its highest level in the last 5 years. This momentum continues into 2022. So far this year, more than 10 million tonnes/year (tpy) of LNG has been signed to end-market users, the report noted.

“The Russian invasion of Ukraine has had a dramatic impact on long-term LNG contracts. Many traditional LNG buyers will neither procure spot gas or LNG nor renew or sign additional LNG contracts with Russian sellers,” said Wood Mackenzie principal analyst Daniel Toleman. “Spot prices have also been high and volatile, pushing many buyers towards long-term contracts. Additionally, some buyers are returning to long-term contracting on behalf of governments to protect national energy security,” he continued.

The result is rising prices for long-term oil-linked contracts under negotiation. Between 2020 and early 2021, the oil-linked price slope for LNG long-term contracts fell into the 10% range, levels not seen in the last 10 years. This was driven by Qatar opting for a market share strategy, other sellers having long uncontracted positions, and Japanese legacy buyers being out of the market for long-term volumes. 

Higher prices

Now, the Russian invasion of Ukraine has pushed prices higher. Middle East sellers are asking for deals above 12%. These deals have limited flexibility, seasonality, and are fixed to a market so the slope of a ‘normal’ contract is higher at 12.5-14%, Toleman said.

“There has been news about sellers wanting 16% or 17% for 10 years, but we have not been able to substantiate this. Short-term deals can attract these rates. We believe that sellers can get 16% slopes for 2- or 3- year deals with volumes ending before the end of 2024. The range is slightly lower at 14-15% for 4- or 5-year deals with volumes that end in 2026,” he continued.

“That said, 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,” Toleman said.

Chinese buyers continue to dominate the market, signing more than 8 million tpy of new LNG sale and purchase agreements this year. Most new contracts are from US supply as operators move projects forward. All these contracts are linked to North American prices. 

Chinese buyers have also continued their strategy of procuring low-priced LNG. In 2020 and early 2021, they targeted oil-linked Qatar volumes. Since mid-2021, Chinese buyers have targeted Henry Hub deals with liquefaction tariffs below $2/MMbtu.

The only non-Chinese deal with an end-user was an important one, Toleman said. It was the first Europe LNG deal since the start of Russia's invasion of Ukraine. Engie signed up to 1.75 million tpy for 15 years from NextDecade’s Rio Grande project, a development that will use carbon capture and storage (CCS) to reduce its emission intensity. 

“Recent brownfield Henry Hub-linked deals are rumored to have liquefaction tolling fees below $2/MMbtu. This follows deals signed last year in a similar range. We expect higher capacity fees for Henry Hub-linked deals under negotiation,” Toleman said.

“This is reflective of two trends. First, more advanced projects capable of delivering LNG in the 2025-2026 timeframe will attract premiums. Second, rising raw material, labor and EPC costs are all driving up the cost of delivering projects on the US Gulf Coast, in turn resulting in higher capacity fees,” he concluded.