Asian buyers seek spot-linked pricing for term LNG

Spot LNG prices near record lows are encouraging buyers to explore the possibility of buying longer-term supply at spot prices, especially as the spread between oil-linked term and spot prices remains wide.

"The spot versus term [price] disparity is outstanding," Hitoshi Nishizawa, a senior executive at Jera said at the CWC Japan LNG virtual summit. "And there is a growing feeling about the importance of reflecting the spot market in the term price."

Asia-Pacific spot LNG prices fell to unprecedented lows this year, as a result of weakened demand in the region and a global supply glut. But Nishizawa stressed that buyers are not approaching the desire for term supplies to reflect spot pricing from an opportunistic perspective.

To be sure, weak demand and high inventory levels have suppressed spot demand among Japanese LNG buyers this year. LNG imports fell in the first five months of this year to 31.1mn t, down by 6.7pc from a year earlier, while spot prices dropped by around 66.5pc over the same period to $1.80/mn Btu on 29 May.

"Having a right price is important for sound development of the LNG market," he added. "Spot prices globally are converging and delinking with oil. And a creative approach [to pricing] would be appreciated." Japanese buyers' term contracts are predominantly linked to oil prices at a percentage of around 14-15pc, with remaining contracts linked to the US Henry Hub natural gas price.

The spread between spot and term prices is currently around $4.91-4.955/mn Btu, based on the ANEA price for first- and second-half August at $2.085/mn Btu and $2.13/mn Btu, respectively, and the Argus Japan oil-linked price for deliveries in August at $7.04/mn Btu on 7 July. The ANEA price is the Argus assessment for spot deliveries to northeast Asia.

Nishizawa did not elaborate on what he considered "a right price". But the director of Japan's trade and industry ministry's (Meti) oil and gas division Takeshi Soda suggested that it would have to be a stable band, which both consumers and producers find workable.

Soda said Meti has no concrete plan to create or encourage the development of a more stable LNG price. But the Japanese government is looking into how to nurture a liquid, transparent and deep market, with a focus on price discovery, he added.

Soda was part of the same panel discussion with Nishizawa, which included BP's global head of LNG Jonty Shepard, Cheniere's senior adviser Katsumi Kuroda and Venture Global LNG's chief commercial officer Tom Earl.

But spot prices at current levels are unlikely to be sustainable over the longer term even though efforts are under way to keep pricing lower and cost structures of projects competitive, according to the speakers.

"We will not see any new projects take FID [final investment decision] if they expect prices to be [$2/mn Btu] in perpetuity," Shepard said. "A lot of work is going on in the industry to reduce the cost of LNG to make it more competitive, and liquefaction costs are going down."

Cheniere's Kuroda suggested that spot prices at around $7-8/mn Btu instead in Asia-Pacific might help to encourage the development of a flexible and stable market, adding that a singular reliance on oil indexation to price LNG was unstable.

Low spot prices have already resulted in producers either delaying or bringing maintenance forward or reducing production, with the most significant supply response to lower prices seen in the US. US LNG offtakers are likely to have cancelled more than 25 cargoes in June and are expected to cancel 40-45 cargoes this month and a similar number in August.

Aggregate US exports fell to 2.45mn t in June from 4.03mn t in May and an average 5.13mn t/month in January-April, based on vessel size. Loadings in June also fell from 3.46mn t a year earlier despite an increase in liquefaction capacity to 73.5mn t/yr from 45.7mn t/yr.

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