Demand for long-term LNG supply contracts is growing rapidly

Current LNG production and projects under development (black, excluding Russia), Russian projects under development (yellow), expected demand dynamics (turquoise), and Russian LNG production (pink). Data: Credit Suisse, Source: Bloomberg

Demand for long-term LNG supply contracts has risen sharply this year thanks to global efforts to reduce imports Russian gas. Producers have taken advantage of this trend by demanding much higher prices on new long-term contracts.

According to a report by the Oil & Gas Journal, 10-year LNG supply contracts are currently worth about 75% above 2021 levels. However, the supply gap is expected to continue as Europe seeks to increase its LNG imports.

Last year, the volume of long-term contracts for the supply of LNG concluded with end users reached a 5-year high, and this year this trend is not going to slow down. According to a report by Wood Mackenzie, contracts were signed with end users this year to supply more than 10 million tons of LNG per year.

For example, Louisiana-based LNG company Sempra Infrastructure, which is majority-owned by Sempra Energy (NYSE:SRE), just signed its sixth long-term contract in five months. The deal provides for the company’s Hackberry subsidiary, Cameron LNG, to supply 2 million metric tons of LNG annually to Poland’s Polish Oil & Gas Co. Sempra Infrastructure has secured another 2mt deal with the same company for its new LNG plant in Port Arthur, Texas.

Most of the new contracts are with US LNG producers, and all these deals are pegged to North American prices. Meanwhile, Chinese buyers continue to dominate the market, signing more than 8 million tons of new LNG sales contracts this year.

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“The Russian invasion of Ukraine has had a big impact on long-term LNG supply contracts,” said Daniel Toleman, chief analyst at Wood Mackenzie. “Many traditional LNG buyers will neither purchase spot gas or LNG nor renew or sign additional LNG contracts with Russian sellers. Spot prices were also high and volatile, pushing many buyers into long-term contracts. In addition, some buyers are returning to long-term contracts on behalf of governments to protect national energy security.”

Not surprisingly, the excellent outlook for the LNG market is driving a resurgence in long-term supply agreements, which experts see as key to moving LNG projects towards a Final Investment Decision (FID).

Indeed, in 2022, potential FIDs will more than double US LNG export capacity. Specifically, in May, Venture Global announced an FID for its Plaquemines LNG project after receiving $13.2 billion in funding. Plaquemines marks the first U.S. FID for an LNG export project since Venture Global’s Calcasieu Pass in August 2019.

Other projects expected to have FID this year include the first phase of Tellurian’s (NYSE: TELL) Driftwood LNG project. This summer, Cheniere Energy (NYSE:LNG) will expand the third line of the Corpus Christi project, while Energy Transfer (NYSE:ET) and NextDecade Corp. (NASDAQ: NEXT) is seeking customers for its LNG projects in Lake Charles, Louisiana and Rio Grande in Brownsville, Texas, respectively.

Prepared by based on OilPrice materials

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