New LNG Project Financing Trend to Overtake Long-term Contracts?
Long-term LNG contracts have always been the driving force behind new LNG project financing. However, now the market is oversupplied, prices are low, making buyers reluctant to enter into long-term commitments. How does this situation impact the LNG market and what is being done to mitigate the effect?
New LNG project financing trend
A secured sales agreement for an extended period of time enables developers to move forward with new projects. The contract terms guarantee that a supplier will sell an assured amount annually, making the LNG project financing secured. Long-term contracts experienced a lag in 2017 when the average length fell from 11.5 years to just 6.7 years, also slowing down the development of fresh construction. The situation rebounded in 2018 with signed contract average duration reaching about 13 years. While this revitalisation helped with new projects getting off the ground, a new trend in financing them seems to be emerging in the LNG market.
Some companies like Shell, ExxonMobil, Qatar Petroleum and potentially Total, Eni and Petronas choose to invest in projects themselves without the safety of a long-term contract. This strategy brings a heightened level of risk, but also lets the companies go ahead with construction. This is useful because the LNG market is steadily growing and additional liquefaction facilities with extra capacity will be necessary by the mid-2020s in order to avoid a supply crunch by the mid-2020s, predicted in Shell’s LNG report.
Is this trend here to stay?
LNG project financing without a long-term agreement as a fallback is a good way to ensure a smoother market in the future, but smaller companies waiting to secure buyers might suffer. Shell’s annual outlook warns that the best way to level the playing field for everyone is to find a resolution between suppliers waiting for long-term contracts and buyers hungry for short & small agreements.
Industry experts and operators are optimistic that the situation will level itself out and long-term contracts are far from dead, especially in the US LNG export marker, reports S&P Global Platts. Although, these sales agreements might change in their nature. Suppliers are willing to work with buyers and allow renegotiation of long-term contracts to provide more flexible solutions and the chance for buyers to take advantage of the changing market and better prices. This means, that contracts might not be as lengthy as 20 years, but a certain amount of returning capital will nevertheless be secured.
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