India Forces Open LNG Contract Talks: Fitch

Petronet LNG’s renegotiation of its 20-year contract with ExxonMobil for Gorgon LNG demonstrates the risks faced by LNG exporters in the over-supplied Asia-Pacific (Apac) market, according to Fitch Ratings.

Indian oil minister September 9 said that India was able to "address the long-term price issue of LNG from Gorgon" to suit the Indian market, with Indian consumers due to receive LNG at an "amicable price soon", which has been done in a similar way to what the country did with LNG from Qatar. In 2009, Exxon and Petronet LNG signed a sales and purchase agreement for the long-term supply of liquefied natural gas from the proposed Gorgon LNG project in Western Australia. The agreement is for supply of approximately 1.5mn mt/yr of Exxon’s share of LNG from the Gorgon project over a 20-year term. Supplies began earlier this year. 

Fitch believes larger LNG importers, such as Japan, South Korea and China, have a strong bargaining position and could push for renegotiations in their own long-term deals.

“A ramping up of LNG production in Australia and the commencement of LNG imports from the US in August 2016 has pushed up supply in the Apac market and put downward pressure on spot prices. Spot prices are now well below those agreed in most existing contracts. Further production increases are in the pipeline, which in an already oversupplied market is likely to keep prices under pressure in the medium term,” Fitch said September 12.

With greater bargaining power, buyers are opting for spot instead of term contracts with short terms also being sought. LNG contracts are typically drawn up for 20-25 years, but there are reports of buyers looking for 10-15 year terms, Fitch said. “Renegotiation of existing contracts takes this a step further. Cases have been rare so far, with the renegotiation between Petronet and Exxonmobil the first instance in Apac involving a contract that uses a standard pricing benchmark. It could create pressure for the renegotiation of other LNG contracts.”

According to reports ExxonMobil has agreed to accept lower prices and to absorb freight costs. It has reportedly reduced prices to less than 14% of Brent from 14.5% on already-contracted supplies, and accepted 12.5% on additional supplies. The alternative may have been termination of the contract by Petronet, which would have forced Exxonmobil to sell output at spot and pursue damages in court.

India is fast growing but still a small player in the global LNG market but larger importers that have not so far looked to renegotiate contracts could have a much more significant impact on exporters, Fitch argued. Japan accounts for around 32% of global LNG imports, South Korea for 13% and China for 10%. India accounts for 7%, slightly more than Taiwan, at 6%.

The market power of Japanese buyers was enhanced by the merger of Tepco Fuel & Power and Chubu Electric Power Co in April 2015. The new entity, Jera, is now the largest LNG buyer in the world. It is reportedly aiming to cut the proportion of its purchases covered by long-term contracts to around 50% from 80%-90%.

Jera also signed a memorandum of understanding in March 2017 with Korea’s Kogas and China’s Cnooc to collaborate in the LNG market, including through the joint procurement of LNG. These three companies, which account for one-third of global LNG demand, are seeking more flexibility in their contract terms with producers. In particular, they are pushing for a change that would allow them to re-sell LNG imports to third parties, which would further weaken producers’ global pricing power.

According to Fitch, LNG producers in Apac could face greater earnings pressure if there was a concerted push for renegotiation of existing contracts by major north Asian buyers.  

Shardul Sharma