Industry casts doubt over future of long-term LNG supply contracts

Amsterdam (Platts)--16 May 2018 511 am EDT/911 GMT

The expected growth in the global LNG market in the coming years will mean buyers can do without long-term contracts, leading industry players said late Tuesday at the Flame conference in Amsterdam.

Instead, with growing volumes of spot LNG available, buyers can either look to shorter-term contracts or the spot market to meet their needs.

Charif Souki, chairman at US LNG developer Tellurian Inc., said long-term contracts in the LNG sector would soon be a thing of the past.

"The market has become sufficiently liquid today that a buyer does not need to enter into a long-term contract," Souki -- who was the founder of US LNG pioneer Cheniere Energy -- said.

Article continues below...

Request a free trial of: LNG DailyLNG Daily
LNG Daily

Platts LNG Daily is vital reading as LNG supply dynamics continue to change in big markets like Japan, China, Middle East, India, Australia, South America and the US. This premier independent news and pricing publication for the global LNG industry gives readers information on every aspect of the global market from new LNG supply projects and contracts to gas pricing analysis. Request a FREE trial to see how Platts LNG Daily can help meet your business needs.

Request a trial to LNG Daily More Information

He said that in the next two years, some 20 cargoes would be available every day on the spot market, or 5,000 cargoes a year. "You're never very far from a cargo," he said.

"There is no incentive, no imperative to have a long-term contract," Souki said, unless a buyer is a large utility that needs the guarantee of supply.

"You have to prepare yourself for the next generation which is a transition to a true commodity business where you don't need a long-term contract. With a 50 Bcf/d market, with LNG on the water, I doubt very much the necessity for long-term contracts is going to remain for much longer," he said.

Tellurian is planning to build the 26 million mt/year Driftwood LNG plant and has tried different methods to market its capacity, including offering to sell its future LNG at a fixed $8/MMBtu price to Japanese buyers.

However, no companies took up the offer.

"We've tried fixed costs, variable costs, Henry Hub-plus, and now we're trying to find a new business model," Souki said.


Mark Gyetvay, CFO of Russia's Novatek, agreed that the long-term contract was coming under pressure, saying that Novatek was looking at a combination of different contract lengths to offer prospective buyers from its planned Arctic LNG-2 project.

These, he said, could include some spot, short-term and medium-term arrangements.

Total's head of gas, Laurent Vivier, meanwhile, said the long-term contract could still have a role to play, but said that size was the crucial factor.

"LNG is a commodity 'in the making'," he said. "There could still be a need for long-term contracts to help finance new LNG projects."

But, he said, a company needed to be global and have a big portfolio, and that final investment decisions for new projects depended on that visibility.

Only one FID on a new LNG supply project was taken in 2017 -- Eni's floating LNG project Coral in Mozambique -- and none has been taken yet in 2018.

Andree Stracke, chief commercial officer at Germany's RWE Supply & Trading, said his company would not be willing to take the risk of a long-term LNG import contract.

"A 10-year horizon is the most that we can risk manage," Stracke said.

He also said optionality was a key consideration in contact negotiations, but that it is difficult to put a value on optionality in a contract.

Souki agreed, saying both sides wanted optionality so that sellers could try to optimize sales during high-price, high-demand periods, while buyers would look to offload their commitment when they didn't need a cargo.

--Stuart Elliott,

--Edited by Jonathan Fox,

Copyright © 2018 S&P Global Platts, a division of S&P Global. All rights reserved.