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LNG projects face new financing and pricing risks | Petroleum Economist

Changes in LNG pricing structures and contract length could shift some risk from buyers to sellers

LNG producers will need to absorb more risk as trading in the market becomes more complex and dynamic, the LNG19 conference in Shanghai heard this week.

What was once an almost static asset market is being forced into a rapid evolution. On the supply side of the market, there are more portfolio players to sit alongside the traditional point-to-point sellers. On the demand side, buyers are now looking beyond long-term contracts and traditional pricing. “Buyers want to benefit from spot markets through smaller contracts, flexible contracts and hub-linked pricing”, says Andy Brogan, EY global oil & gas sector leader at consultancy EY.

Brogan foresees new contract structures in which LNG export project developers price and absorb increased market risk, a role that traditional project finance debt had previously assumed. “LNG project developers with large balance sheets — oil and gas majors and national oil companies — will be best placed to assume [these new] project lifecycle risks”, says Brogan.

As those projects come to fruition and LNG is finally produced, analysts see it emerging into an increasingly complex market in terms of contract length and pricing. At the event, US gas firm Next Decade announced a supply deal with Shell that will be indexed to Brent crude, in contrast to the Henry Hub or JKM pricing structures that other US export projects have adopted. Russia’s Novatek reiterated its intention to sell 50pc of its Arctic LNG 2 output through spot sales but also signed two 15-year 1mn t/yr term contracts, one on an Fob Murmansk basis with trader Vitol and the second with Spain’s Repsol on a Des Iberia basis.

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LNG projects face new financing and pricing risks.