Tim Fourteau (Singapore), Alex Woody (Japan), and Yun Yong (Singapore), White & Case, discuss several trends in LNG SPAs and the broader LNG market.
T
he global LNG market is in a period of structural change. Demand is expected to surge across growth markets, particularly from Asia, and existing overcapacity on the supply side, particularly in North America, has seen LNG developers jostling to capitalise by offering shorter, more flexible and innovative, contractual structures. Against this backdrop, this article reflects on three trends in LNG Sales and Purchase Agreements (SPAs) and the broader LNG market.
Trend 1: The continued rise of JKM Recently announced LNG SPAs have priced cargoes by reference to both Platts Japan Korea Marker (JKM) and Dutch TTF, reflecting the growing use of the JKM price benchmark for LNG imports into Asia. Historically, long-term LNG SPAs have been priced by reference to substitute energy sources in the market of import. In the Asian market, LNG imports were typically indexed against crude oil prices, factoring in the average weighted energy content of LNG relative to oil. In contrast to the Asian market, LNG imports into the US and Europe have been benchmarked against LNG’s most direct competing energy source in those markets – pipeline gas. Given the well-established gas market in the US, the price for LNG imports into the US was linked to the gas trading price at the Henry Hub, an access and connection point in the southern US for gas transmission pipelines (imports of LNG into the US were becoming necessary before shale discoveries in the US made the country an LNG exporter). Following the US shale boom, several import projects were converted and expanded to be export projects. These export projects tended to use a tolling or quasi-tolling model whereby LNG was essentially sold FOB at a price equal to a Henry Hub linked feedgas cost plus a fixed component to cover liquefaction cost plus margin. In the initial wave of US liquefaction projects, a Henry Hub linked pricing model was attractive to Asian LNG buyers
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