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Long-term contracts are over: the global battle for LNG is ahead

Greater Middle East (bbabo.net), - Global competition for LNG between Europe and Asia is yet to come. Until 2026, long-term contracts have already been sold out and the market may expect new gas price hikes due to competition from Europe and Asia, according to the Japanese Ministry of Economy. This could lead to even higher fuel prices and unstable supplies, experts say.

“In recent years, changes in the international energy situation, a number of equipment problems in producing countries, and historically rising fuel prices have added to the uncertainty around LNG purchases. This winter and beyond, the supply and demand situation is expected to be serious,” said the Japanese Ministry of Economy, Trade and Industry (METI). Today, the ministry held a meeting with the heads of energy companies to find out the situation on the gas market. After that, the findings were published.

“Until 2026, all long-term contracts under which LNG can be obtained at a stable price (pegged to the price of oil) have been sold out,” the ministry said. It indicates that the Chinese and South Korean authorities are promoting long-term contracts, mainly by state-owned companies. European authorities are also beginning to work in this direction, despite the fact that in the EU alone, additional annual demand may be about 37 million tons (51 billion cubic meters).

Due to the reduction in Russian gas supplies, the EU countries will continue to increase LNG imports, while the world's production capacity will only decrease by 2025 due to underinvestment in old projects, the Japanese ministry said. They added that there are risks with existing projects in the US and Malaysia.

“Global competition for LNG is likely to intensify further,” the document says. The ministry predicts that the monthly decline in LNG supplies by 2026 could reach 4 million tons (5.5 billion cubic meters).

The Japan National Energy and Metals Corporation (HGPI) said at a meeting that as early as this January there could be a shortage of 7.6 million tons of LNG, which is equivalent to about a month's volume of imports from Japan and Europe as a whole, adds Bloomberg, whose correspondents were present at the meeting. Mitsubishi spokesman Jun Nishizawa noted that gas prices could remain high for 30 years or more, not to mention several years.

“In a situation where Europe is forced to look for additional volumes to replace Russian gas, and China can restore demand after a recession in 2022, competition for free volumes in the spot market will inevitably increase,” explains Sergey Kaufman, an analyst at FG Finam.

At the same time, the absence of a significant number of new capacities in the LNG market in the next 2-3 years (and the contractual nature of existing ones), in his opinion, will aggravate the situation: “Gas and LNG prices will remain at an elevated level in the next 1-2 years, and the EU will be forced to not only to import LNG in increased volumes, but also to continue moderate savings to the detriment of the industry, as is already happening.”

The message from the Japanese Ministry of Economy means that for the next two years, additional LNG volumes will be available only at spot or quasi-spot prices, which give a significant, and at times breathtaking, premium to oil contracts, notes Alexei Grivach, deputy director of the National Energy Security Fund (NESF). In his opinion, the situation will affect everyone who does not have a sufficient level of security with oil-linked contracts, including Europe, but also the poorest countries and Latin American countries, which have always bought gas on the spot.

If LNG under long-term contracts with an oil peg can now cost $ 500 per thousand cubic meters, then with a spot one - $ 1,200-1,300. In August, stock quotes in Europe exceeded $ 3,500. In this situation, many LNG suppliers and traders are interested in reducing the portfolio of long-term contracts in order to maximize profits.

“On average, pegging prices to oil quotes in the LNG market concerns 43% of contracts, as spot prices are gaining popularity against the backdrop of the current gas crisis,” says Sergey Grishunin, managing director of the National Rating Agency (NRA) rating service. He gives an example that back in 2021, the share of oil-linked contracts was at the level of 65%.

“We should expect that next year the share of fixed contracts will decrease. In addition, if gas prices continue to rise, it is possible that suppliers will refuse previously concluded contracts at fixed prices, pay a penalty to the buyer and sell products on the spot with additional profit at a higher price,” says the managing director of the NRA rating service.

Several global suppliers have done so this year with India and Pakistan.“Obviously, the market is waiting for a period of turbulence, when LNG supplies will be redirected directly along the route in order to close contracts with a higher price. Will the EU market be able to fully compete on purchase price with buyers from Asia? This may lead to unstable gas supplies to the EU, which will prevent the restart of the enterprises of the metallurgical and chemical industries that were stopped this year,” Sergei Grishunin said.

The easiest way to ensure gas supplies to Europe and, accordingly, Asia, is to resume large-scale imports of Russian pipeline gas. However, at this stage, one should hardly expect any serious changes in the EU policy towards the Russian energy sector, notes Aleksey Grivach, deputy director of the FNEB.

Long-term contracts are over: the global battle for LNG is ahead