Power shift from seller to buyer

Oil and Natural Gas industry have always been an industry that experiences the cycle of changes because of a number of factors invo?lved in the business. These factors often include supply-demand fundamentals, geopolitics, technology, et cetera.

One major difference between natural gas and crude oil is that, in case of natural gas first find the buyer then start building the infrastructure because LNG cannot be stored like crude oil. Due to the availability of natural gas and supporting infrastructure to extract the gas and transport in the form of LNG( Liquefied Natural Gas), many new players like US and Australia have become the exporter that can give stiff competition to traditional exporter like Qatar, Malaysia, Nigeria, Algeria, Indonesia etc.

Early years LNG was limited only to few hands and SPA (Sales and Purchase Agreement) used to be very tight with no scope of price or volume renegotiation in any case. When there are more sellers ready to sell the gas the bargaining power has shifted from seller to buyer. LNG spot price was as high as $18/mmBtu in 2011 and price had dramatically come down as low as $5/mmBtu due to enough spot LNGs available. Due to this sellers are forced to make changes in the nature of contract as well.

For sellers and buyers to come to an agreement and be on the same page some adjustments had to be done in the contracts and some flexibility needed to be brought in the contracts. Some of these are in pricing adjustments like removing the constants in the pricing equation, reducing price expectation by lowering the slope (Y=mX+C; Y=price; m=slope; X=base index; C=constant), adding a clause to review the slope every 3-5 years and set the floor ceiling in the s-curve accordingly or even try and move to some other favorable indexations.

Non-pricing adjustments that have been taking place are like adding the destination flexibility in the contract, bringing more flexibility in the LNG volume, bringing changes intakes or pay clause, good alliances between buyer and seller. There have been changes that are taking place in term contracts as well; more of shorter long-term contracts and spot LNGs. By mutual agreements sellers, traders and buyers also use swap mechanisms like time swaps, geographical swaps to reduce their price risk.