Viewpoint: LNG Term deals in focus amid volatile year

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Chinese state-owned CNOOC’s recent LNG term supply deal with US supplier Venture Global marks at least the 22nd term supply agreement signed by a northeast Asian buyer this year, reflecting a growing trend among the region’s LNG buyers to move away from spot transactions towards term deals.

This indicates a radical shift from just about a year earlier, when buyers shied away from long, seemingly rigid term commitments and swarmed into the spot market, which offered relatively more flexible and enticing options to meet their LNG requirements.

But the tables have turned, with buyers now looking to lock in LNG rates far more competitive than spot levels.

China’s state-controlled CNOOC this month signed an agreement to receive LNG from US supplier Venture Global across 20 years, marking its first term deal with a US exporter. It likely paid around a $1.80-1.90/mn Btu premium to 115pc of the US natural gas Henry Hub price for the 2mn t/yr of LNG it will receive from the planned 24mn t/yr Plaquemines LNG project, and around a $2/mn Btu premium to 115pc of Henry Hub for the 1.5mn t/yr it will receive from the 10mn t/yr Calcasieu Pass LNG facility, market participants said. The firms did not state when deliveries under the deal will begin, but market participants expect it to be in 2023.

China leads interest in term procurement

CNOOC is not the only one. Fourteen Chinese buyers, including CNOOC, have signed a total of 20 term deals in this year alone, making up 87.5pc of the northeast Asian buyers to have done so (see chart below).

This is up from just around three Chinese consumers that signed term contracts in 2020.

Chinese consumers have heeded official calls to prioritise their term offtakes to ensure the security of supply, particularly during peak demand seasons, with exceptionally volatile spot prices this year providing the extra push to minimise risk in an increasingly unpredictable market.

But it’s not just the Chinese buyers that recognise the merits of term deals. South Korea’s Posco is likely in discussions with US firm Cheniere to sign a deal for 400,000 t/yr of LNG to be delivered on a fob basis across 10 years from 2025, market participants said.

And fellow South Korean independent Prism Energy is likely in talks with Russian producer Novatek to buy 500,000 t/yr of LNG across 12 years starting from late 2023 or early 2024, they added. Around 2-3 Japanese buyers are also considering signing term deals in the near future, market participants said.

Term deals signed by buyers from South Korea, Taiwan and Japan collectively accounted for around 9.1pc of the total term agreements inked by northeast Asian importers this year.

The slew of term contracts comes as spot LNG prices remain at very high levels, putting them at a wide premium to term prices.

Oil-linked term contract prices for January deliveries based on a three-month crude average (301) contract stood at $11.08/mn Btu, assuming a 14.5pc indexation to Brent and $7.64/mn Btu, assuming a 10pc indexation, on 23 December. The slope of many historical Asia-Pacific long-term contracts was pegged at around 14.5pc to Brent, but was significantly lower at 10-11pc in recent years.

These are around one-sixth to one-third of the corresponding price for spot deliveries in the same month. The ANEA price, the Argus assessment for spot LNG deliveries to northeast Asia, was assessed at $42.720/mn Btu for second-half January on 23 December. Argus was no longer assessing prices for first-half January deliveries on that day.

Sharp gains in European gas hub prices and regional winter restocking demand, coupled with bouts of supply disruptions, have supported northeast Asian spot LNG prices at levels above those in the same period the previous years.

The front half-month of the ANEA price rose to a record high of $44.980/mn Btu for second-half January deliveries on 22 December. It has since eased slightly, tracking losses in European gas hub prices, but cold weather in northeast Asia has led to expectations that further downside may be limited. The front half-month ANEA price was last assessed at $33.255/mn Btu for second-half January on 28 December.

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