China goes for term deals amid record high LNG spot prices
Chinese companies, both state-owned and private, have signed a number of long-term LNG deals since last year, mainly with US-based LNG developers, but also with Qatar. These deals, most of which are 15 to 20 years in duration, come despite a sharp fall in Chinese LNG imports in 2022. The latest government data shows that in July Chinese LNG imports dropped 15.4% year/year to 4.74mn metric tons. The cumulative LNG imports in the first seven months of the year were 35.93mn mt, down 20.3% yr/yr.
Yet the large number of long-term deals indicate that Chinese importers are confident about the long-term demand prospects for LNG, and are eager to secure future supplies at stable prices. The drop in LNG imports this year is seen as a short-term phenomenon primarily due to COVID-related lockdowns. It also suggests that Asian importers are now moving away from spot purchases, as term deals are more attractive given the prevailing high spot prices. This is interesting as LNG buyers in emerging Asia not too long ago were more inclined towards flexible spot deals. China in 2020 signed just a few long-term deals while it penned 23 contracts last year, according to reports. The trend has continued this year as well.
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The US dominates the deal list
The long list of deals signed with US companies includes Venture Global in November penning two 20-year agreements to supply a combined 4mn mt/yr of LNG to China's Sinopec from its Plaquemines LNG facility in Louisiana. The deal is the largest LNG long-term contract signed between China and the US.
Venture Global LNG in December executed another 20-year sales and purchase agreement (SPA) with CNOOC Gas & Power, marking the first LNG supply agreement between a US exporter and China’s largest LNG importer.
Under the SPA, CNOOC Gas & Power, a unit of China National Offshore Oil Corp, will take 2mn mt/yr of LNG on a free-on-board basis from Venture Global’s 20mn mt/yr Plaquemines LNG facility. CNOOC also signed a deal to import 1.5mn mt/yr of LNG, for a shorter duration, from Venture Global’s 10mn mt/yr Calcasieu Pass facility, also in Louisiana.
Cheniere Energy November last year signed an agreement with China’s state-owned Sinochem for the supply of an initial volume of 900,000 mt/year of LNG. That volume could eventually increase to 1.8mn mt/yr under a 17.5-year term agreement. Prices will be fixed to Henry Hub, the US benchmark for the price of natural gas, plus an unspecified fixed liquefaction fee.
Chinese state-owned gas supplier Guangzhou Development Group (GDP) in April this year signed a 20-year deal for 2mn mt/yr of LNG supply from Mexico Pacific LNG Markets. The company said that the contract would come into force when Mexico Pacific's 14.1mn mt/yr West Coast North American LNG project in Sonora, Mexico, was up and running. GDP will take 1mn mt/yr of LNG from the project's first and second phases, with the volumes priced on a formula tied to the US Henry Hub index. Feedstock gas for the project will come from the US.
Another US LNG developer NextDecade has signed three SPAs with Chinese buyers this year. In March it entered into a binding heads of agreement (HoA) with Guangdong Energy Group Natural Gas for the long-term supply of LNG from its Rio Grande LNG project in Texas.
The HoA provides that Guangdong Energy will purchase up to 1.5mn mt/yr of LNG over a 20-year term indexed to Henry Hub, initially from the first train at Rio Grande, which is expected to begin commercial operations in 2026.
In April, NextDecade signed a 20-year agreement with Chinese private entity ENN for the supply of 1.5mn mt/yr of LNG, also from the Rio Grande. And then in July, it agreed to supply 1mn mt/year of LNG to China Gas on a free-on-board (FOB) basis. The purchase price is indexed to the benchmark price of Henry Hub.
In July this year, PetroChina entered into an agreement with Cheniere Energy to buy 1.8mn mt/yr LNG from Cheniere’s Corpus Christi terminal from 2026 to 2050. The SPA is indexed to Henry Hub plus a fixed fee on a FOB basis. Half of this amount depends on Cheniere deciding to move ahead with a new build-out of its Corpus Christi terminal beyond the seven-train Corpus Christi Stage 3 project.
Qatar too has penned LNG supply deals with Chinese companies in the past year. China Suntien Green Energy in December signed a contract with Qatargas 2 for the annual import of 1mn metric tons/year of LNG over 15 years. In December, Guangdong Energy Group Natural Gas Co. agreed to buy 1mn mt/yr of LNG for 10 years from QatarEnergy. In September last year, Qatar Petroleum signed a deal with CNOOC to deliver 3.5mn mt/yr of LNG over a 15-year period.
Australia is missing in action
For Australia, China is one of the biggest LNG export markets along with Japan. Yet, Australian LNG developers are surprisingly missing in all this action.
While the US has been signing multiple deals this past year, with four major ones in July 2022 alone, Woodside’s Scarborough project remains only 36% contracted, according to energy consultant EnergyQuest. This is an unusual situation for a major LNG project that is already under construction.
Woodside last year announced the final investment decisions to approve the Scarborough and Pluto Train 2 developments, including new domestic gas facilities and modifications to Pluto Train 1. The work on Pluto Train 2 began on August 24.
The Scarborough field is located approximately 375 km off the coast of Western Australia and is estimated to contain 11.1 trillion ft3 of dry gas. Development of Scarborough will include the installation of a floating production unit with eight wells drilled in the initial phase and 13 wells drilled over the life of the Scarborough field. The gas will be transported to Pluto LNG through a new approximately 430 km trunkline.