Buyers Reign in LNG Pricing
Easwaran Kanason
Leading Change In How Energy Companies Learn & Reposition Into The Future. Award Winning SME Entrepreneur - E50
A tremor ran through the world of LNG this week, as news filtered out that India had successfully negotiated a price cut in its 20-year LNG deal with ExxonMobil. This is the second such win for India, which has vocally expressed its grievances of being locked into expensive long-term contracts signed when LNG prices were at their peak, but are now out-of-sync in an increasingly oversupplied market. Most see this as a harbinger of times to come, as LNG buyers gain in power, and many are watching to see if the traditional LNG consuming juggernauts of Japan, South Korea and China might follow.
There are two sides to this story.
From India’s perspective, it marks the second time the country had successfully renegotiated the pricing terms of its LNG contracts. The first was in 2015 with Qatar, and the second with ExxonMobil. Thus far, this is the only such incidence of a major contract revision. Of the major Asian LNG buyers, India has probably been the most aggressive in seeking better deals for LNG prices, though Japan and South Korea have long grumbled as well. Details of the deal are scarce, but reports suggest that LNG will now be supplied at less than 14% of the Brent oil price, from a previous 14.5%, with additional supplies at 12.5%. Under the new deal, ExxonMobil would probably receive some 15% less revenue per unit of sales. Even more surprising is that ExxonMobil agreed to absorb shipping charges, traditionally borne by the buyer. This win could embolden other buyers, pushing for more flexibility and similar concessions from producers.
From ExxonMobil’s perspective, this is the lesser of two evils. Given the amount of LNG sloshing around, there was a chance that India – through Petronet LNG – would walk away from the deal completely. While ExxonMobil would be free to pursue legal damages, it instead chose to win a little concession back. Under the new deal, Petronet LNG will pay less, but will also take an extra million tons from ExxonMobil’s share of the Gorgon project in Australia, raising the total amount to 2.5 mtpa. In an oversaturated market, quantity wins. Better to have a ready outlet for volumes, rather than duke it out in other contracts, possibly for even lower prices. ExxonMobil may have lost some revenue, but it has also guaranteed additional sales of 20 million tons to Petronet over 20 years. With so much more supply yet to come from Australia, Canada, Qatar, the US and Africa, to name a few, from this perspective, this is a win for ExxonMobil.
What does this mean for LNG? These changes were always going to come, due to the tipping of power towards buyers. The market is already moving towards spot and shorter-term contracts in the range of 3-5 years, rather than 15-20 years. Chances are most of the legacy multi-decade contracts will be phased out soon, with new ones signed at terms favourable to buyers. Some buyers will follow India’s lead and demand renegotiation; producers should bend at the knee because a volume sold is better than a volume in storage. They should also take the long-term view.
Yes, LNG supply is rising fast, but fewer new projects are currently being sanctioned. At the rate LNG demand is growing, it looks likely that the market will tighten around 2023-2025. If that happens, the negotiating power will be back with the producers. The trend to shorter-term contracts will actually benefit them then, as price trends will be more favourable. It might cause some pain immediately, but producers should not resist these changes. Flexibility is good for all. And one day, the market will be back in their favour.
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Leading Change In How Energy Companies Learn & Reposition Into The Future. Award Winning SME Entrepreneur - E50
7 年Yes, maintaining market share is key strategy in the current landscape. With gas no longer just being piped; LNG is a lot more competitive in that sense. Plenty of willing international suppliers now, even from the US!
CSCO I CPO I Private Equity | AIESEC | Guest Lecturer | (views expressed are personal)
7 年Contracts provide supply security! When there is a massive shift in leverage, commercials can always be re negotiated! EM had the leverage when supply was tight and prices had peaked; India has the "massive" leverage when prices are at historic lows, supply is plenty and EMs assets are grossly under utilised.
My sense is they spread the loss over a higher volume.india reduced 0.5 dollars on 5 mtpa but agreed to buy 1 mtpa at 2.5 dollars higher.
Petrochemicals & Energy Trader @ Kempar | CEO & Founder | Fitness Enthusiast | Budding Philanthropist |Proud Father, Husband & Son!
7 年So if and when market becomes tight for some reason, does it give a chance for EM to re-negotiate the contract in their favour again!? What's the point of a Long term contract then?