Trends affecting long term gas supply contracts

3 Trends Affecting the Long Term Gas Supply Industry

  Since 2014, the spot price of LNG has dropped by two thirds to $5.4 per million British thermal units. This has been due to a combination of factors; the swell of supply with new suppliers, mainly Australia and the United States, the slump in crude oil and large buyers such as Japan and Korea slowing purchases[1]. This has led to three new trends for the long term gas industry; short term contracts, the growth of FSRUs in emerging markets and a new demand in the transport industry.  

#1 The Rise of Shorter Term Contracts

With the surplus of supply, power has effectively been handed to the buyers, who are seeking out flexibility in contracts, largely due to the uncertainty over future demand. This is leading to an inevitable rise in shorter term contracts. In a recent interview with Reuters, Philippe Sauquet, President for Gas, Renewable and Power at Total, commented that “the current market situation favours this type of creativity”[2]. Total recently negotiated a short term LNG supply contract with Japan’s JERA[3], clearly signally that they are open to shorter-term contracts with more flexibility and various indexation to oil and gas. Speaking at the Asia Oil and Gas Conference, Petronas also said they are willing to try shorter-term LNG contracts and smaller cargo sizes[4] to adjust to the over-supplied market. With many of Petronas’ top buyer contracts due to expire early in 2018[5], and Upstream CEO Anuar recently saying that long term contracts have “almost become a novelty”[6] we can expect a real deviation from the established long-term, fixed volume model. This attitude has been backed by Ryan Schleicher, Commercial Director of Jordan Cover LNG, who believes “long term contracts that expire over the next 10 years will probably be replaced with spot and mid-term contracts”[7]. While new markets may be lured by the prospect of shorter term contracts at lower prices, there is a need for diversification of spot, short-term and long-term contracts to avoid playing a risky game[8].  

#2 The Growth of FSRUs in Emerging Markets

Emerging markets are set to provide an upsurge in demand, thanks to new buyers being able to gain access to LNG through floating storage and regasification units (FSRU). FSRUs are increasingly being used to meet demand in smaller or seasonal markets, or as a temporary solution until onshore regasification facilities are built[9]. There are a number of benefits to FSRU, the main draw being that they are less than half the cost of an onshore facility. According to Unit Economics, a newly built FSRU costs around $260 million, a clear difference from the minimum $700 million for a traditional, land based terminal. They can also be ordered, made and delivered in 2-3 years opposed to the 5-7 years needed for an onshore import terminal[10]. One company has even started converting old LNG carriers into FSRUs, coming in at a cost of $160 million and only taking 14-16 months to be operational. Demand for FSRUs is growing in a number of countries, including Brazil, China, Indonesia, Pakistan, Egypt and Jordan, with imports jumping from around 10mn t/yr in 2012 to almost 30mn t/yr in 2016[11]. Woodside Chief Executive, Peter Coleman believes this demand “is set to grow further… Bangladesh, India, the Philippines, Sri Lank and Vietnam are considering deploying FSRUs”. He notes that “emerging markets now account for 5pc of global LNG demand, but that is expected to rise to 27pc by 2025”[12]. BI analyst Elchin Mammadov believes FSRUs will be “a major driver of LNG demand in an oversupplied global gas market”[13].  

#3 The New Wave of Demand from Transport Fuel

Suppliers could see demand being driven by sectors outside of gas generation, such as transport and industry, according to Shell’s Director of Integrated Gas and New Energies, Maarten Wetselaar[14]. In some countries, the steel, iron, cement, plastic and chemical industries cannot be electrified, so demand growth will come from the use of LNG as a transport fuel in ships, road and rail. Considering the International Maritime Organisation’s announcement of new caps on sulphur content in shipping fuel from 2020, demand could be pushed towards LNG[15]. Coleman highlights the industry potential for this, commenting “if all the ships in the world converted to lower-emission LNG, that market alone could account for 200mm t/yr”. Berstein Research are expecting similar growth, projecting the demand for LNG in the transport sector to reach 24.4 million tonnes a year by 2020, representing around 10% of global LNG imports[16]. China is likely to remain the single largest market for gas in transport, but post 2020 the US and Europe should see a strong demand growth[17].  
[2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17]   Long Term Gas Supply Contracts Conference C5 Berlin