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LNG projects face new financing and pricing risks

Changes in LNG pricing structures and contract length could shift some risk from buyers to sellers

LNG producers will need to absorb more risk as trading in the market becomes more complex and dynamic, the LNG19 conference in Shanghai heard this week.

What was once an almost static asset market is being forced into a rapid evolution. On the supply side of the market, there are more portfolio players to sit alongside the traditional point-to-point sellers. On the demand side, buyers are now looking beyond long-term contracts and traditional pricing. "Buyers want to benefit from spot markets through smaller contracts, flexible contracts and hub-linked pricing", says Andy Brogan, EY global oil & gas sector leader at consultancy EY.

Brogan foresees new contract structures in which LNG export project developers price and absorb increased market risk, a role that traditional project finance debt had previously assumed. "LNG project developers with large balance sheets — oil and gas majors and national oil companies — will be best placed to assume [these new] project lifecycle risks", says Brogan.

As those projects come to fruition and LNG is finally produced, analysts see it emerging into an increasingly complex market in terms of contract length and pricing. At the event, US gas firm Next Decade announced a supply deal with Shell that will be indexed to Brent crude, in contrast to the Henry Hub or JKM pricing structures that other US export projects have adopted. Russia's Novatek reiterated its intention to sell 50pc of its Arctic LNG 2 output through spot sales but also signed two 15-year 1mn t/yr term contracts, one on an Fob Murmansk basis with trader Vitol and the second with Spain's Repsol on a Des Iberia basis.

"The LNG market is at a critical transition point. New projects, such as LNG Canada, are getting underway and trying to sign new contracts as a significant number of long-term contracts are starting to roll off", says Ira Joseph, head of gas and power at analysis firm Platts Analytics, adding that some 200bn³/yr of long-term contracts will expire between 2020 and 2030.

"We are seeing an emergence of liquid spot markets in Asia, Europe and the US," says Joseph. But he still expects that that oil-indexed contracts are likely to have a significant presence in the market even in the long-term, accounting for 300bn m³/yr as far out as 2030.

Spot trade volumes jumped nearly 30pc in 2017 to almost 77mn t, according to data from the International Group of Liquefied Natural Gas Importers (GIIGNL).

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