LNG sellers to face rising price risk
Baku, Azerbaijan, Aug.29
By Leman Zeynalova – Trend:
The liquefied natural gas (LNG) market is in transition towards a fully globalized and liquid commodity market, Trend reports with reference to Fitch Solutions Macro Research (a unit of Fitch Group).
“This transitional phase is marked by major shifts in the make-up of buyers and sellers, and continued evolution in contract and pricing structures,” reads a report released by the company.
Fitch Solutions believes that a glut in the global gas market and increased competition to attract will increasingly skew contract terms and pricing formulae in favor of the buyer.
“Shorter-term and more flexible contracts, combined with a swing in demand growth from developed to emerging markets, will limit access to traditional project finance vehicles for a number companies. Adding to this is the issue of creditworthiness, as the credit quality among buyers migrates downwards,” reads the report.
A rise in Asian price disputes will further increase long-term price risk, raising the importance of the cost competitiveness of the individual LNG plant, the company believes.
The report shows that the rapid growth in liquefaction capacity is depressing spot LNG prices, and this is likely to last for the next several years as demand growth is catches up. “This combined with the large number of liquefaction plants seeking FID has created a buyer’s market. In terms of pricing, LNG contracts are, to some extent, frozen. Typically, a contract’s pricing formula will specify a benchmark index, a slope (the percentage of the benchmark at which the LNG will be priced) and a constant (and additional fixed price element, often relating to transport costs). Often the slope will be S-curved – that is, changes in the LNG price will become less sensitive to changes in the benchmark price at extreme highs and lows – and the formula will include a cap and floor for the price of the LNG.”
Pricing formulae negotiated during periods of low prices tend to be more favorable to the buyer (and vice versa), and this depresses the cost of the contract LNG even as prices rise, according to Fitch Solutions.
Lower LNG prices pressure project economics and have a bearing on the cost and availability of project financing, reads the report.
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