Brent-linked long-term LNG contracts are back in vogue

Long-term liquefied natural gas (LNG) contracting activity is off to a strong start in 2023, with around 13 million metric tonnes per annum (mmtpa) of signed in just over four months. 

Speaking on the sidelines of the Australian Petroleum Production and Exploration Association (APPEA) Conference in Adelaide, Daniel Toleman, Principal Analyst for Global LNG at Wood Mackenzie said that the bullish conditions in the market have continued.  

“In 2022, the volume of long-term LNG contracts signed returned to its highest level since 2012, with 81 mmtpa of new LNG SPAs (sales purchase agreement) and HOAs (head of agreements) signed,” Daniel Toleman said. “This momentum has continued into 2023.”  

Since December last year, a flurry of Omani LNG deals have been signed. These contracts will replace existing Omani LNG contracts which expire in 2025. Buyers include Japanese utilities, the oil majors, a Southeast Asian buyer, a Turkish buyer, and the trading arm of a Chinese national oil company. These deals signal the return of Japanese buyers to long-term contracting, Mr Toleman added.  

The duration of the deals from Oman LNG ranges from four to 10 years. Over 90% of 2022 contracts were for 15 years or longer but the Omani deals are shorter, partly because the plant is already onstream and partly because their Omani gas reserves beyond this tenor have not been fully proved. 

Brent pricing continues to rise. Between 2020 and early 2021, long-term oil-linked contract prices fell into the 10% range, levels not seen in the last 10 years. This was driven by Qatar opting for a market share strategy.  

Qatar is now asking for deals above 12.5%. These deals have limited flexibility, and seasonality and are fixed to a market so the slope of a "normal" cargo is higher, between 13-15.0%. For example, the 27 year, Qatar-Sinopec deal starting in 2026, is rumoured to have a slope of above 12.75% with limited flexibility. We understand that most of the deals from Oman LNG, which have more flexibility, have been signed in the mid-to-high-13%s for FOB and low to mid-14%s for DES. 

That said, prices vary greatly based on the terms, tenure and start date of new deals. The market remains bifurcated with contracts starting before or after 2026, attracting premiums or discounts to this range, respectively.  

Recent mid-term deals reportedly signed by Chugoku Electric also support this. The deals start in mid-2023 for 7/8-year terms and have pricing above oil parity before the end of 2025, reducing to the low 13%s beyond this. 

There have also been a number of 3-year contracts that started early this year. These deals have been signed in the 17%s. A number of price reviews have also been agreed across the last six months. These contracts have been agreed for the period of 2023-7, FOB, in the low-to-mid 13%s.  

Wood Mackenzie expects further deals to be announced in the coming months, with additional deals from Qatar's projects. Oman LNG may also announce new deals as all contracts in place are set to expire in 2025-2026. So far, OLNG has only re-contracted only half the capacity, 6 mmtpa, from its project. Recently, it was reported in the press that China National Petroleum Corp (CNPC) was close to finalising a deal with QatarEnergy to offtake LNG for around 30 years. 

Toleman added that Wood Mackenzie expects further deals to be announced in the coming months, with additional deals from Qatar's projects. Oman LNG may also announce new deals as all contracts in place are set to expire in 2025-2026. So far, OLNG has only re-contracted only half the capacity, 6 mmtpa, from its project. Recently, it was reported in the press that China National Petroleum Corp (CNPC) was close to finalising a deal with Qatar Energy to offtake LNG for around 30 years. 

Earlier today Daniel Toleman addressed delegates at the APPEA Conference about the geopolitical issues surrounding the LNG market since Russia invaded Ukraine. Governments around the world are trying to balance the need for reliable, affordable energy while pushing ahead with decarbonisation and energy transition.  

Editor’s note 

• Brent pricing in LNG works by linking LNG prices to the Brent benchmark oil price. This means that if a long-term LNG contract is 13% of the Brent benchmark, the price per million British thermal units is 13% of whatever the Brent oil price is at the time of the agreement.
• The APPEA Conference is taking place in Adelaide between 15-18 May. For more information, please go to APPEA Conference and Exhibition