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    Shorter LNG Contracts Unsettle Future Projects: Poten

Summary

The average length of LNG contracts fell to its lowest ever in 2017, according to LNG expert consultancy Poten & Partners

by: Mark Smedley

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Shorter LNG Contracts Unsettle Future Projects: Poten

The average duration of LNG offtake contracts signed in 2017 almost halved to 6.7 years, consultancy Poten & Partners said this week, describing this as the shortest ever recorded. It compares with an average duration of 11.5 years for LNG contracts signed in 2016.

“With many options for supply and uncertainty over future prices, last year buyers signed dozens of short- and medium-term contracts rather than commit to long-term deals,” said Poten’s white paper, released February 13.

Only two new LNG projects were green-lighted in the past two years, it said adding “Without long-term contracts that will enable more projects to be financed, the construction of new capacity may lag demand growth and set the stage for tighter markets and higher prices in the future.”  The number of deals with a tenure of more than 10 years collapsed to six in 2017 from 14 in 2016, while those with a 6-to-10 year tenure fell to just four in 2017 from ten in 2016.

Poten also reported that the average 2017 LNG contract's volume declined to 0.66mn metric tons/yr, from 0.9mn mt/yr in 2016.

Some contract duration and volume details are in the public domain. As a confidential adviser to LNG buyers and sellers, Poten has access to some additional data however; its paper can thus discuss trends while keeping specifics anonymised.

It noted a “strong move toward Brent” crude oil, and away from other benchmarks popular in recent years, including European gas hubs, Henry Hub, LNG indices, and gas-oil hybrids – although it noted increased liquidity in the Asian spot LNG swaps market.

Asked if the move toward oil-indexing was because a greater proportion of LNG contracts in 2017 involved Asian buyers and traditional LNG marketers, Poten's head of business intelligence Jason Feer told NGW: "There doesn't seem to be a regional component. I think the real reason is that most buyers don't see any sense in taking additional risk by linking prices to markets or instruments that are illiquid. For a five year contract, management and everyone else is comfortable with Brent, while for longer terms, there is more incentive to try to figure out better ways to price."

Poten also notes how several US projects are now offering a range of pricing alternatives to attract buyers. Tellurian last year, for instance, began marketing a plan, for its proposed Driftwood project in the US Gulf, whereby buyers would pay $1.5bn upfront for 1mn mt/yr of guaranteed LNG offtake for the life of the plant.

The white paper can be requested from Poten here.

Average LNG contract length (Credit: Poten & Partners)           

                                                                      

LNG contracts by length (Credit: Poten & Partners)