LNG in World Markets Featured Article

Brisk Pace of LNG Contracting Continued in 2023

This current feature was extracted from the latest edition of Poten’s LNG in World Markets, a monthly service published on January 31, 2024.

Market players signed new long-term LNG contracts at a frenetic pace in 2023, a signal natural gas will be part of the global energy mix for decades to come, despite forecasts that hydrocarbons are headed for extinction.

Poten & Partners has confirmed that 67 sales and purchase agreements (SPA) covering more than 62 MMt were signed in 2023. Another 21 heads of agreements (HOA) or other similar intermediate-stage deals were also signed, covering another 21 MMt.

The overall volume of 62.3 MMt signed in 2023 in new SPAs fell short of 2022’s record volume of nearly 72 MMt. However, the 67 deals in 2023 eclipsed the number of transactions penned in 2022, when 57 SPAs were signed. The drop in volume and increase in the number of deals year-onyear means that the average deal size in 2023 was about 930,000 t, compared to just over 1.25 MMt per transaction in 2022.

The rapid pace of dealmaking allowed three US projects – Rio Grande LNG Phase 1, Plaquemines LNG Phase 2 and Port Arthur LNG Phase 1 – to reach final investment decisions (FID) in 2023. Deals signed by several other North American projects allowed them to advance within striking distance of reaching FID this year.

US projects threatened by government intervention

As in 2022, US projects registered the largest number of deals and greatest volume compared to other countries, with 15 contracts signed for 19.6 MMt. However, the pace of US transactions slowed considerably compared to 2022, when US projects logged 35 deals for 46.6 MMt.

One significant cloud looming over US projects is the end-January announcement by the Biden administration of a pause in regulatory approvals for LNG projects. The administration said the move was intended to allow more time to better assess the environmental impact of additional LNG exports. Several projects seeking to reach FID still require export licenses from the Department of Energy to proceed. The delays are likely to hinder progress on those projects while benefiting projects that are already fully permitted.

Another five deals from Mexican liquefaction projects fed by US natural gas accounted for an additional 7.6 MMt. In 2022, two deals from Mexico accounted for 4.4 MMt.

Buyers focus on customization rather than location

Buyers in 2023 appeared to focus on achieving their preferred combination of price, contract duration and flexible terms over concerns about where their LNG will come from. In 2023, buyers signed 28 deals accounting for 17.2 MMt in which the origin of the LNG was not specified.

SPAs Signed by Year

This heavy reliance on portfolio supply was in stark contrast to the eight portfolio supply deals made in 2022 that accounted for just 4.4 MMt.

In a significant departure, aggregators in 2023 appeared to step back from the buying spree they had previously been on for several years. Aggregators – defined by Poten as large companies that buy, sell and produce LNG – signed just eight SPAs for 13.3 MMt, down sharply from the 22 deals for 32.6 MMt that these companies inked in 2022.

The 13.3 MMt signed by aggregators was still an increase on the average volume purchased by aggregators between 2018 and 2021 of just under 8.5 MMt, but the yearon-year decline seems to signal a more reserved approach by the companies that had accounted for large percentages of global contracts over the past few years.

By contrast, end users stepped up the pace of contracting in 2023, signing 46 SPAs with a total volume of more than 37 MMt, up from 28 deals in 2022 for 29.4 MMt. Asia-Pacific buyers led this category, signing 35 deals for more than 28.5 MMt.

Buyers from China, Thailand, Bangladesh and Japan were among those signing deals in 2023. European end users continued to be reluctant to sign long-term deals in 2023, inking only six deals for just over 6 MMt. Two of the deals were for three years.

Aggregators added to their books as traders were active sellers

Even as aggregators bought less in 2023, they did not see a significant increase in the long-term sales of the vast amounts of LNG they had taken onto their books over the past years. Aggregators signed seven long-term deals in 2023, covering 3.8 MMt, a slight increase over the five deals they inked in 2022 for just over 2.8 MMt.

However, traders had a relative banner year in 2023, selling 5.8 MMt via nine contracts, compared to just a single contract for 500,000 t in 2022.

Producers sold less in 2023 than they did in 2022, signing 43 deals for nearly 49 MMt, compared to their record haul of 50 deals for more than 68 MMt.

SPA Volume by Buyer Type

End users recorded a surprising number of deals, selling 3.1 MMt through seven deals as some major Asia Pacific players sought to reduce their long-term supply amid indications that long-term demand may not be as robust as some previously thought. Chinese companies accounted for all but one of these deals, which included four SPAs of 16 years or longer, indicating that local market players are concerned about long-term Chinese demand growth.

Oil- and LNG-linked pricing increased as gas-linked deals fell

LNG pricing continued to be fairly muddled in 2023, with significant volumes transacted against natural gas pipeline, Brent and LNG benchmarks. At 27 SPAs covering nearly 31 MMt, natural gas benchmarks were the most widely used pricing mechanism in 2023, but this was down sharply from 2022, when gas benchmarks accounted for 40 SPAs with nearly 55 MMt of volume. US benchmarks Henry Hub and Waha accounted for 20 of these deals for about 23.6 MMt of volume.

There was a notable increase in deals done against Asia Pacific LNG benchmark JKM, with 11 SPAs signed for 6.3 MMt. This compares to just a single deal done last year for 500,000 t. Given the volatility of European pricing and the fact that at least some Asian buyers feel they have enough US exposure, some chose to explore a greater use of regional pricing. Most of the deals were for well under 1 MMt, though two were close to 1 MMt and one was for nearly 2 MMt. Contract durations were also short, with all but three being for five years or less.

However, three deals were for 20 years or more. European benchmark TTF accounted for just four deals for a little over 3 MMt, reflecting the ongoing reluctance of European buyers to commit to long-term supply and the wariness of buyers in other regions to risk pricing against volatile European markets.

Dated Brent continued to account for a significant share of LNG contract pricing, with 25 deals for 23 MMt signed against the traditional benchmark. This was more than double 2022’s tally of 12 contracts for 11.4 MMt.

HOAs signal that additional work needs to be done

The 21 HOAs and MOUs are interesting for what they say about possible future SPAs, as counterparties work to wrap up negotiations and finalize deals.

Eight deals for nearly 10 MMt are US-based transactions that are supporting or dependent on projects that have not yet reached FID. Given the recent decision by the Biden administration to impose a pause on new permits for LNG projects, these deals could be at risk if buyers opt to seek more certainty with other suppliers in the US that have all their regulatory approvals.

Another eight pending deals are for volumes from Oman. These are mostly for 800,000 t to 1 MMt for durations of four to 10 years. While there have been complaints about the high price of these deals (in some cases as high as 15% of Brent), they look likely to be finalized, as deals with shorter durations are in demand from European buyers and increasingly from some Asia Pacific buyers, particularly Japanese firms.

2023 Contract Pricing by Volume

 

Subscribe to Poten’s LNG in World Markets


Industry participants rely on Poten’s LNG in World Markets business intelligence service for the best information to drive business success. To activate your subscription or learn more, connect with us today: bi-info@poten.com

 

Get to Know Poten’s LNG Business Intelligence Services

Actionable short term market intelligence

  • Monthly country-level forecasts
  • Global arbitrage analysis
  • Detailed data on future trade flows

Learn More

Analysis of LNG finance across the value chain

  • Annual ranking of LNG lenders
  • Detailed analysis of project lending
  • Intelligence on project finance structure
  • Insight on lending to the shipping sector

Learn More

A 10-year price, supply and demand forecast

  • 10-year projections
  • Bottom-up demand forecasts
  • LNG imports and exports
  • Special focus on shipping

Learn More

Insight on LNG markets, projects and the industry

  • Commercial and technical details of global projects across the value chain
  • Detailed coverage of spot markets with data and analysis on market fundamentals, price levels and trade flows
  • Shipping activity and technology developments

Learn More

Visit Us On TwitterVisit Us On Linkedin