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Glut forces LNG producers to offer flexible deals from global portfolios

FILE PHOTO: An LNG tanker passes boats along the coast of Singapore on February 3, 2017. REUTERS/Gloystein Henning/File Photo

By Jessica Jaganathan

SINGAPORE (Reuters) - The world's biggest liquefied natural gas (LNG) producers including Shell, Total and Petronas are increasingly selling from global supply pools instead of dedicated projects as buyers leverage a fuel surplus to force ever more flexible deals.

This marks an accelerated turning from traditional long-term contracts that lock customers into taking regular volumes from specific projects under oil-linked pricing formulas.

Global oversupply that has pulled spot LNG prices down by more than 50 percent over the past half-year has producers succumbing to consumer demands for fuel on shorter notice and without sourcing or destination restrictions.

"A more dynamic and liquid LNG market, and the need for greater flexibility by traditional LNG buyers, is providing opportunities for shipping optimisation and trading, and enabling new entrants such as LNG traders," said Saul Kavonic, head of energy research for Australia at Credit Suisse.


For a graphic on Asia LNG price vs supply, click: https://tmsnrt.rs/2WUxqC1


EXPANDING PORTFOLIOS

Royal Dutch Shell, holder of the world's biggest LNG supply portfolio, signed deals last year with Hong Kong's CLP Power, South Korea's SK E&S and Panama's Sinolam LNG for deliveries that could come from any of its global projects, according to an annual report published this month by the Paris-based International Group of LNG Importers (GIIGNL).

The Anglo-Dutch major is also adding new Australian project Prelude and its LNG Canada plant to its supply pool, which already includes fuel from Australia, Egypt, Peru and Russia.

Shell's LNG sales volumes hit 71.21 million tonnes in 2018, up 8 percent from the previous year, driven by increased LNG purchases from third parties and higher LNG output, the company said in its 2018 annual report.

"It's important that the industry can supply LNG to customers on the basis that they want to buy," said Steve Hill, Shell's executive vice president for gas and energy marketing and trading, at a conference in Singapore in March.

France's Total, with the second-largest LNG portfolio, will more than double its overall supply to about 40 million tonnes a year by 2020 from 2017, and out of that volume about 65 percent will have flexible destination or be reloadable, according to a company presentation on its website.

This comes with the start-up of new projects in Russia and Australia and as Total increases offtake volumes from third-party United States export sites.

Malaysia's Petronas - which handles production for the world's third-biggest LNG-supplying nation - also signed several short-term deals last year from its portfolio including its first ever term deal with India.

"Portfolio selling enables higher margins through trading and optimisation, facilitates marketing to take new project final investment decisions, and allows sellers to provide greater supply flexibility to customers," Kavonic said.

Spot and short-term trades made up 32 percent of overall LNG volumes in 2018, up from 27 percent in 2017 and less than 20 percent in 2010, GIIGNL said in early April.


For a graphic on global LNG spot market, click: https://tmsnrt.rs/2VWCgP4


NEW BUYERS, NEW RISKS

LNG supply is expected to grow this year by a record 40 million tonnes, which could further increase spot volumes.

With new buyers entering the market, their needs are evolving quickly, said Nicholas Browne, gas and LNG director at consultancy Wood Mackenzie in Singapore.

"New markets usually want LNG quickly because of the rapid growth of floating storage and regasification units (FSRUs), which has accelerated their market entry," Browne said.


"Portfolio players are well suited to meet this need," he said.

Bangladesh and Pakistan are two of the relatively new buyers, both expanding import capacities and looking for new supplies.

Besides Petronas, another long-time LNG supplier that is going the portfolio route is Woodside Petroleum. The Australian producer signed a heads of agreement with China's ENN Group in April on such a deal, as it markets gas from its proposed Scarborough project.


Also, Russia's Novatek is selling 50 percent of its volumes from its Arctic LNG 2 project on a spot basis, which it says is driven partly by the emergence of portfolio players.

Developers are also increasingly taking final investment decisions on new projects without having firm sales agreements already in place.

Shell decided to go ahead with its $30 billion LNG Canada project last October with few buyers, while Exxon Mobil Corp and Qatar Petroleum committed to their Golden Pass LNG project in the United States without binding buyers to the total volume.

But this potentially exposes projects to new pricing risks, and some portfolio players could be trying to mitigate these risks by increased trading in spot markets and by buying or selling cargoes using alternative pricing formulas.

"The shift from long-term take-or-pay contracts to portfolio supply is placing greater risks on project sponsors and exacerbating the risks of oversupply," Bernstein analysts said in a note in April.


For a graphic on Asia LNG demand vs supply growth, click: https://tmsnrt.rs/2VyLjWs



(Reporting by Jessica Jaganathan in SINGAPORE; Additional reporting by Meng Meng in SHANGHAI; Editing by Henning Gloystein and Tom Hogue)