Understanding LNG Deal Flex Components

Flex components are the individual options that may be written into an LNG deal contract, which the holder has the right, but not the obligation, to exercise.

There are a range of different options which can form part of an LNG deal structure, such as location flex, price flex, volume flex, and the number and timing of cargos such as DQT and UQT. Flex can either be explicit (terms written into the contract) or implicit (arising from an existing LNG portfolio such as the option to sell an FOB cargo into Europe or Asia).

The chart below shows an LNG deal’s base value alongside the value of the individual flex components required to calculate total deal value. As can be seen, the value of the deal without flex is relatively small at just under $1/MMbtu. The value of flex is roughly worth almost 4 times the base value of the deal, the majority of which comes from price flex.

Common examples of flex options

Location Flex

Location flex is the option to divert gas to another region to take advantage of favourable prices, thereby ‘changing’ the value the buyer receives for the cargo.

For example, in winter, demand in Asia can spike so the price increases in order to attract gas from other regions such as Europe. We saw the same with the Russia/Ukraine conflict where European supply chains were disrupted, requiring European markets to pay a premium to attract supply away from other regions.

Location flexibility also allows buyers to respond to dynamic market conditions and operational constraints, making it a valuable feature in LNG contracts.

DQT (Downward Quantity Tolerance)

DQT is the option to cancel cargos and can enhance the profitability of a long-term LNG contract through the flexibility to respond to changes in price and market conditions.

For example, in a 1-year strip deal where the buyer commits to receiving one cargo per month over the contract period, there may be times when the gas price at the destination drops, resulting in a negative net-back and ultimately, a loss for the buyer. The ability to cancel the cargo in these scenarios helps to avoid losses and thus improves the overall profitability of the deal.

UQT (Upward Quantity Tolerance)

UQT refers to the flexibility granted to the buyer to take on additional cargos. UQT options allow buyers the manage supply more dynamically and improve profitability by taking advantage of favourable price conditions.

For example, during favourable price conditions, the buyer may choose to take on additional cargo/s to maximise profit. As the saying “make hay while the sun shines” goes, activating UQT flex options can be extremely valuable as they often have additional flex options attached to them such as location or price flex to further amplify profit upside.

Volume Flex

Volume flex provide buyers with the flexibility to adjust purchase volumes up or down within agreed limits, allowing buyers to dynamically respond to market and supply/demand changes.

These options are important as they allow buyers to adjust for operational tolerances. When used based on economics, volume flex can also have a considerable commercial value.

Compound Flex

When multiple flex options are exercised together, they are known as ‘compound options’, which refers to the fact that exercising

multiple flex options together can result in greater revenue potential than each individual component can provide in isolation. Due to this ‘synergistic’ effect, compound options can have a significant impact on deal profitability.

Understanding the different types of flex options, and their different uses, is critical to effective LNG deal and portfolio management.

For more information on the importance of flex components, and how to use them effectively to improve profitability and meet changing operational needs, check out our ‘6 Things You Need to do to Understand the Impact of LNG Deal Flex Components’ article.