The Balancing Act: Long-Term Stability and Market Flexibility in LNG Contracting
The Energy Council
Where You Can Identify and Access Capital, Find Investment, Meet Partners and Do Deals
?
The Balancing Act: Long-Term Stability and Market Flexibility in LNG Contracting
SEPTEMBER 2024 - North America's LNG export capacity is projected to more than double by 2028, underscoring the region's expanding influence in the global LNG market. This growth, driven by contributions from the United States, Canada, and Mexico, not only meets the surging global demand but also significantly alters contracting practices.
North America’s LNG export capacity is projected to more than double by 2028, growing from 11.4 billion cubic feet per day (Bcf/d) in 2023 to 24.4 Bcf/d. As North America, particularly the United States, solidifies its position as a leading LNG exporter, it bolsters the region's capacity to conduct negotiations for both long-term and flexible contracts. This enhances the variety of contracting options available to international buyers and reinforces global supply security.
Low Prices and the Spot Market?
The dynamics of the LNG market are greatly influenced by periods of low prices, which enhance buyers' negotiation power over terms such as prices, delivery schedules, and destination clauses. This leverage can lead to a shift from traditional long-term contracts to more flexible, short-term arrangements and spot market purchases, depending on buyer expectations about future price trends. For instance, in 2023, the trend towards short-term contracting was evident, yet 45 long-term contracts were signed globally, indicating that while buyers enjoy more favorable terms due to lower prices, they still commit to long-term deals to secure future supplies.
Influence of Futures Market on Contracting Dynamics
The natural gas futures market also impacts LNG contracting practices. Currently, the futures market is in a state of contango, where prices are projected to rise. Specifically, the market anticipates higher natural gas prices for the next winter (Dec 2024–Mar 2025), with an increase of over 82% expected through winter 2025–26. This situation indicates market expectations for demand to outstrip supply, reflecting a decrease in the natural gas surplus relative to the five-year average (2019–23) due to slowing production. Simultaneously, demand is expected to rise as new LNG terminals come online. This foresight into future market conditions provided by the futures curve helps stakeholders make more informed decisions about entering into long-term agreements versus relying on spot market transactions.
领英推荐
The Strategic Importance of Long-Term Contracts
Long-term contracts have traditionally been a cornerstone of the LNG industry, often spanning multiple decades. These contracts are crucial not only for stabilizing cash flows but also for de-risking potential expansion projects. For instance, pricing structures within these contracts usually link the sale price of LNG to a global gas benchmark plus a liquefaction fee, providing predictability in revenue streams despite market fluctuations.
>> Read the full article here.
Discover more insights from the Energy Council:
The Energy Council connects senior energy executives to finance and investment professionals in order to enable access to capital and facilitate deals. Take a look at our global assemblies to find out more.
Co-Founder & CTO @ Xiist | Your dreams, our code-let’s make magic, Digital Transformation
1 个月Impressive insights, The Energy Council! The projected growth in North America's LNG export capacity showcases the region's pivotal role in the global energy market dynamics. Keep up the great work in driving long-term stability and market flexibility in LNG contracting.