Industry experts weigh up outlook for LNG contracts, financing
Reporters from across the energy and finance industries put their questions to an International Gas Union (IGU)'s release of its discussion panel on July 6. The panel in London was organised to follow up the IGU's release of its World LNG Report 2022.
With Europe is struggling to keep on track to reaching its climate goals while battling an energy crisis, Jonathan Stern, a distinguished research fellow at Oxford Institute for Energy Studies, said European states, notably Germany, would try to keep LNG supply contract durations short, so that it can scale back purchases once more renewable energy becomes available.
"The real calculation is how long the contract will be – say the customer needs the LNG for 10 years, if the customer signs a 15-year contract, does the contract allow them to re-sell volumes into Asia? Of course, if every European customer thinks along similar lines, then it just creates the next market cycle," he said.
Vincent Demoury, speaking on behalf of GIIGNL, the international group of LNG importers, agreed with Elliot’s argument while adding that financing agreements for major liquefaction developments would increasingly depend on the length of the long-term sales agreements secured by their backers.
Demoury said: “Today you cannot finance big liquefaction projects on the back of a 10-year contract. We hear the European Commission say they won’t know what they need beyond 2030, well in that case it’s not realistic to say we will be able to attract cargoes or develop new volumes with such short durations. So if we want to diversify away from Russian gas, then we will need to maintain the existing sources of natural gas and energy, and we will need that to develop new supply projects.
“This will replace the 155bn m3 of gas [imported to EU from Russia in 2021 ], which is equivalent to a third of the existing global energy markets. You won’t find these very easily unless you develop new projects unless you secure the financing with these new contracts," he said.
Another key question facing the LNG industry is how quickly final investment decisions will be made, in light of the market's tightness on the one hand, and financiers now applying stringent emissions criteria in line with their environmental, sustainability and governance goals, on the other.
Demoury said: “Right now, it is still very challenging. There are more than 160mn metric tons of projects which are fully approved in the US alone, and some of these projects are struggling to get finances," he said.
“We see a number of long-term contracts being signed but for the time being mostly with Asian buyers and Chinese buyers. If Europe wants to attract this volume and compete with Asia in the coming years, it will also need to enter that space and to contract energy. It does not guarantee that the volumes will come to Europe, because the market is functioning and the price signals we take are related to Asia, Latin America or Europe depending on price differentials, but at least it will guarantee there are sufficient volumes at global level.
Energy is a global market, and anything that happens in China has an impact in Europe - anything that happens in the US - for instance the outage at Freeport LNG a couple of weeks ago - has an impact in other places of the world.”
Echoing Demoury’s argument was Rystad Energy’s John Frederik Muller. Muller said European politicians had a tendency to view energy as a problem that will blow over in time, freeing resources for other political priorities.
Muller said: “I think a lot of European politicians see this as a short term problem and something that will fix over time whilst they manage to get their energy plans back on track. I’m not so sure that’s the case – gas has been under-prioritised in Europe for quite some time. An important thing for energy security in Europe, at least in the short to medium term, is to mature some of the political thinking around this, and how you can now interact with the global LNG market if you’re moving away from Russian gas.”
There has been a lot of discussion about African LNG suppliers filling the supply void in Europe as the continent cuts down on Russian gas purchases.
Tatiana Khanberg, the IGU's strategic communications and membership director, said: “This is where we get to the importance of long term view and long term policy signals, which would be very important for the financing signals to be there.
“These projects have the potential to be developed, and from the economic development and fiscal perspective it of huge value for Africa potentially, because we also know that’s where most of the people in the world who need access to energy to date live. We have a billion people without access, so domestically gas could do a lot of good as well. So it is important to consider that perspective as well.”
The fourth speaker on the panel was S&P Global’s head of benchmarks Vera Blei. In her closing remarks, Blei said the energy market had never been as “transparent” as it is today, in a major positive for the industry.
Blei added: “We’ve been working on bringing transparency to energy pricing in Asia for the best part of a decade. With JKM, I think the developments over recent months has shown the role that the Atlantic LNG markets are playing to bring transparency in how LNG pricing connects with pricing at the Atlantic pipeline hubs and into oiling pricing.
“So when it comes to determining trade flows, attracting supplies and making investment decision, there’s a lot of tools the industry now has at hand, which it didn’t have before. I think particularly for the Atlantic market it’s particularly fortunate to have all the different pricing that’s apparent to come to the right conclusions and decisions going forward.”