July 2023 Highlights
- European shift to LNG drives interest in long term SPAs, with consumers evaluating SPA volume, duration and pricing indexation for supply security while balancing decarbonisation goals
- Global gas crisis causes JKM & TTF volatility surge, reducing interest in long term FOB contracts tied to JKM or TTF
- New contracting trends emerge: HH indexed FOB U.S. supply & Brent indexed SPAs in demand, benefiting North American liquefaction and traditional suppliers.
Emerging LNG Contracting Trends
The shift from Russian gas to LNG has heightened focus on supply security, leading to increased interest in long-term sales and purchase agreements (SPAs), while balancing decarbonisation goals. Consumers have to evaluate SPA volume, duration, and pricing indexation.
Buyers have shown interest in spot gas-based indexation due to growing JKM liquidity and global gas price benchmarks (JKM, TTF) trading in the money vs. a typical Brent linked contract over 2020 and H1 2021.
However, the global gas crisis caused a reversal in this trend as JKM and TTF volatility surged due to prices detaching from traditional anchors (i.e., the European coal to gas switching channel). While volatility has eased in 2023, there remains risk of tightening global gas balances and increasing volatility as we move into winter. Additionally, the retirement of European coal capacity and reduced Russian gas imports are driving a structural reduction in European gas market flexibility, supporting higher volatility in the long term.
This has led to the emergence of new trends in contracting:
- Interest in HH indexed FOB U.S. supply contracts, with subsequent downstream Asian HH indexed SPAs to offset exposures.
- Momentum has reduced for FOB (U.S.) supply contracts tied to JKM or TTF, partly due to banks reluctance to finance projects with commodity risk tied to volatile JKM or TTF indices.
- Increase in Brent indexed SPAs as buyers seek price stability, and as traditional suppliers, namely Qatar, look to market growing volume.
Ultimately, these trends have favoured North American liquefaction and traditional suppliers. The choice of indexation on the buy side is crucial in driving the value of flex terms within contracts, depending on their interaction with global gas spot pricing signals.
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