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Europe’s need to replace Russian gas led to dozens of LNG contracts

Oil&Gas Materials 28 November 2022 16:43 (UTC +04:00)
Europe’s need to replace Russian gas led to dozens of LNG contracts
Laman Zeynalova
Laman Zeynalova
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BAKU, Azerbaijan, Nov.28. The urgent need to mitigate dependence on Russian gas imports has triggered a search for additional supplies and, has resulted in dozens of new LNG contracts signed this year, including more than 25 deals signed by US producers (for more than 35 million metric tons per year), Trend reports November 28 with reference to Oxford Institute of Energy Studies (OIES).

“Although legal and commercial aspects of these new contracts are generally confidential, the reported contract terms (mainly between 15 and 25 years) and the estimated average duration of new contracts nearing 20 years, signal a significant rise in long-term contracting. This, in turn, means a departure from the earlier trend favoring shorter deals. The resurgence of long-term LNG contracts could either serve as a short-lived phenomenon (applied ad hoc to solve the looming supply crisis) or mark a major shift in contracting practices in the industry. Certainly, the current re-focus on long-term contracts is being driven by a unique set of circumstances, where expectations of buyers and sellers in relation to long contract terms could have become aligned,” reads a report released by OIES.

The institute experts note that while sellers generally favor long-term commitments (especially for new gas and LNG projects that require financing), the uncertainties of future decarbonization requirements have created an additional incentive for the sellers to lock substantial LNG volumes into long-term contracts.

“Meanwhile, security of supply has re-emerged as the key imperative for buyers, who need to secure stable gas and LNG supplies to meet their domestic demand and are unable to accept the risks of short-term purchases. One of the questions that may arise in relation to new long-term contracts is whether high spot prices will sustain oil indexation in these contracts. Importantly, high spot prices (similarly to oil price drops during the pandemic) temporarily affect LNG price levels but do not resolve the issue of price formation. The choice of a pricing arrangement should prioritize a price formation mechanism that is best suited to the relevant economic and market conditions in the long run, rather than being influenced by price levels that are momentarily seen as favourable. With that in mind, it seems unlikely that recent events will alter the earlier trajectory of departure from the use of oil indexation in gas and LNG prices.”

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