Supply build pushes fundamental changes in global LNG markets

(Wall Street Journal; June 15) - As billions of dollars of investment continues to flow into natural gas production and exports globally, there are signs that supplies of the energy source have already caught up with demand. Prices of liquefied natural gas have fallen to record lows in Asia this year, enabling buyers to drive a harder bargain in contract negotiations. With the U.S. Gulf Coast due to start shipping LNG late in 2015, concerns about potential future shortages of gas have dissipated, at least for the near term.

Almost 5.8 trillion cubic feet of additional annual export capacity will be operational globally by 2020, about 40 percent above current levels. As the gas gushes, Asia’s LNG market is being transformed and contract terms are changing. Until recently, LNG was mostly supplied under rigid conditions set out by gas producers. Buyers would typically have to commit to 20-year deals, at formulas linked to oil prices, with conditions such as bans on reselling cargoes that were enforced even after a shipment left port.

As markets have changed in buyers’ favor, they are opting for shorter-term contracts, sometimes as little as one year. Pricing is becoming more flexible, too. “Buyers have the curse of choice. They can buy at an oil-linked price, they can buy at a (U.S.) Henry Hub-linked price and they can buy on a European gas-based price,” said Matthew Arnold, head of LNG at EDF Trading. Terms that were rarely disclosed publicly are becoming more transparent, industry sources said, and pricing is becoming less complex.

“Asian buyers are in a strong position to negotiate for further concessions,” said analysts at BMI Research. Already, buyers in China, Japan and South Korea are using the prospect of LNG shipments from the U.S. as leverage in seeking lower prices and better terms from sellers such as Russia.