A tremor ran through the world of LNG this week, as news filtered out that India had successfully negotiated a price cut in its 20-year LNG deal with ExxonMobil. This is the second such win for India, which has vocally expressed its grievances of being locked into expensive long-term contracts signed when LNG prices were at their peak, but are now out-of-sync in an increasingly oversupplied market. Most see this as a harbinger of times to come, as LNG buyers gain in power, and many are watching to see if the traditional LNG consuming juggernauts of Japan, South Korea and China might follow.
There are two sides to this story.
From India’s perspective, it marks the second time the country had successfully renegotiated the pricing terms of its LNG contracts. The first was in 2015 with Qatar, and the second with ExxonMobil. Thus far, this is the only such incidence of a major contract revision. Of the major Asian LNG buyers, India has probably been the most aggressive in seeking better deals for LNG prices, though Japan and South Korea have long grumbled as well. Details of the deal are scarce, but reports suggest that LNG will now be supplied at less than 14% of the Brent oil price, from a previous 14.5%, with additional supplies at 12.5%. Under the new deal, ExxonMobil would probably receive some 15% less revenue per unit of sales. Even more surprising is that ExxonMobil agreed to absorb shipping charges, traditionally borne by the buyer. This win could embolden other buyers, pushing for more flexibility and similar concessions from producers.
From ExxonMobil’s perspective, this is the lesser of two evils. Given the amount of LNG sloshing around, there was a chance that India – through Petronet LNG – would walk away from the deal completely. While ExxonMobil would be free to pursue legal damages, it instead chose to win a little concession back. Under the new deal, Petronet LNG will pay less, but will also take an extra million tons from ExxonMobil’s share of the Gorgon project in Australia, raising the total amount to 2.5 mtpa. In an oversaturated market, quantity wins. Better to have a ready outlet for volumes, rather than duke it out in other contracts, possibly for even lower prices. ExxonMobil may have lost some revenue, but it has also guaranteed additional sales of 20 million tons to Petronet over 20 years. With so much more supply yet to come from Australia, Canada, Qatar, the US and Africa, to name a few, from this perspective, this is a win for ExxonMobil.
What does this mean for LNG? These changes were always going to come, due to the tipping of power towards buyers. The market is already moving towards spot and shorter-term contracts in the range of 3-5 years, rather than 15-20 years. Chances are most of the legacy multi-decade contracts will be phased out soon, with new ones signed at terms favourable to buyers. Some buyers will follow India’s lead and demand renegotiation; producers should bend at the knee because a volume sold is better than a volume in storage. They should also take the long-term view.
Yes, LNG supply is rising fast, but fewer new projects are currently being sanctioned. At the rate LNG demand is growing, it looks likely that the market will tighten around 2023-2025. If that happens, the negotiating power will be back with the producers. The trend to shorter-term contracts will actually benefit them then, as price trends will be more favourable. It might cause some pain immediately, but producers should not resist these changes. Flexibility is good for all. And one day, the market will be back in their favour.
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The amount of natural gas held in storage in 2019 went from a relatively low value of 1,155 billion cubic feet (Bcf) at the beginning of April to 3,724 Bcf at the end of October because of near-record injection activity during the natural gas injection, or refill, season (April 1–October 31). Inventories as of October 31 were 37 Bcf higher than the previous five-year end-of-October average, according to interpolated values in the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report.
Although the end of the natural gas storage injection season is traditionally defined as October 31, injections often occur in November. Working natural gas stocks ended the previous heating season at 1,155 Bcf on March 31, 2019—the second-lowest level for that time of year since 2004. The 2019 injection season included several weeks with relatively high injections: weekly changes exceeded 100 Bcf nine times in 2019. Certain weeks in April, June, and September were the highest weekly net injections in those months since at least 2010.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
From April 1 through October 31, 2019, more than 2,569 Bcf of natural gas was placed into storage in the Lower 48 states. This volume was the second-highest net injected volume for the injection season, falling short of the record 2,727 Bcf injected during the 2014 injection season. In 2014, a particularly cold winter left natural gas inventories in the Lower 48 states at 837 Bcf—the lowest level for that time of year since 2003.
Headline crude prices for the week beginning 4 November 2019 – Brent: US$62/b; WTI: US$56/b
Headlines of the week
South Sudan was officially recognized as an independent nation state in July 2011 following a referendum held in January 2011. The South Sudanese voted overwhelmingly in favor of secession, which led to Sudan losing 75% of its oil reserves to South Sudan. Although South Sudan now controls a substantial number of the oil–producing fields, it is dependent on Sudan for transporting oil through its pipelines for processing and export. The transit and processing fees South Sudan must pay to Sudan to transport its crude oil are an important revenue stream for Sudan.
After an agreement was reached on the transit dispute that led to a temporary shutdown of crude oil production, the governments of Sudan and South Sudan shifted their focus from border conflicts to the mitigation of their respective domestic opposition factions. The domestic political dynamics and the security situations in both countries will continue to be a potential risk for disrupting the countries’ oil supplies and exports.
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In South Sudan, President Salva Kiir and the leader of the main opposition faction, Riek Machar, reached a peace agreement in September 2018, which led to reduced violence from the civil war in South Sudan. Although the peace agreement indicates progress, whether the agreement will bring prolonged stability and an inclusive and stable form of governance is unclear. The current agreement is similar to the previous one, which was signed in 2016 and collapsed after two months, and the current iteration does not address crucial elements such as power sharing between the factions and security arrangements that would allow Machar to safely return from exile. Without significant progress in improving the security and political environment, South Sudan’s ability to attract investors and restart production at its fields to increase production will be limited.
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