LNG lawyer touts benefits of short- term offtake contracts [LNG2023]
The time may have come for the LNG industry to dispense with some of the long-term offtake contracts which have traditionally been required to enable projects to proceed, a top LNG lawyer told the LNG2023 conference on July 13.
“The need for that long-term offtake is what really slows down projects all over the globe,” said Jason Bennett, chair, global projects department, Baker Botts L.L.P., the world’s largest LNG law firm.
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He was part of a panel examining commercial trends across the LNG value chain.
In the past 10 years there has been a huge run-up in liquefaction numbers, to about 370mn tonnes/year with a long- term trend in LNG supply to match, he said. Most of the offtake was backed by long-term contracts with creditworthy offtakers, with about 90% carrying terms of 15, 20 or 30 years and, most recently, 27 years, Bennett said in a paper.
“The assumption for normal markets like a fruit market is that there’s a deep liquid pool of suppliers and purchasers so you have buyers and sellers who are going to be out there,” he said. “The fruit vendor doesn’t have to have a five-year contract to sell fruit in order to be in business.”
Bennett said what had sparked his paper is that projects are beginning to look at early [pre-commercial] cargoes and assigning some value to them in project financing. “You’re also seeing a lot of equity offtake and some credit for unmarketed cargo,” he said. “The real question is how far this can be pushed.” Bennett’s merchant LNG project is not about merchant LNG projects which buy natural gas and then sell it. “What we are talking about is liquefaction facilities developed without significant reliance on long term offtake contracts with credit-worthy buyers.”
It doesn’t have to be the whole project, said Bennett, who is looking at 3-4mn tonnes in a nine- or 10mn-tonne project. Some projects could be 100% contracted but with contractual volumes of two to three years.
“Instead of launching a facility with 10 or 15 years of LNG sales, you launch with 7mn tonnes, have 15 years of offtake, 3mn tonnes have five years of offtake and after that there’s no confirmed sale.”
The message to the projects and the banks is that “you’re looking to the market for the rest of the return.”
Large LNG players with credit worthy balance sheets already are taking more equity and if Europe is any indication “it’s totally flexible,” he said. That means that someone took the credit risk to obtain the cargo and now will take it wherever they like in response to market circumstances.
Bennett said he believes this can become a predictor of how fast the LNG industry can grow as there are a limited number of players willing to do merchant LNG and there’s a lot of LNG demand that doesn’t look like a 10-year market.
At the same time, there’s considerable LNG demand interested in a more open spot market that would look more like a fruit stand where they could buy LNG on a 90-day rolling programme, he said.
Bennett believes more markets would begin turning to that model because if they are going to look to LNG to meet energy security needs, they want to make sure there’s an adequate supply which means there’s a need for more LNG available on a merchant basis.
For Bennett, a key advantage of such a market would be that for the first time there would be a transparent global market backed by financial trading. For example, a project could put 4mn tonnes up for auction on a 90-day rolling basis. Any LNG in that area could be pushed into the market which would grow rather quickly, he said.
“What you are seeing is the market shifting to believe there’s a gap,” said Bennett. “When you see owners take a lot of equity LNG from a project, they fundamentally believe there is a long-term cost differential between the cost of that commodity and the long-term market.”
He said in his practice he is seeing a lot more appetite for equity LNG. “This tells me that there is a belief in the U.S. that cost-plus LNG has a future in the long-term market.”
There are lending constraints, though, as bankers are not known for moving quickly and being willing to take risks, said Bennett.
He also pointed out that 10 years ago, 5mn tonnes of LNG accounted for a significant share of the global market but now that’s only 1.5%.
This feature was originally published in the LNG2023 Daily, produced by NGW during the LNG2023 conference in Vancouver July 10-13.