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.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)