Top three LNG buyers to search for alternative LNG pricing structure after paying a total cost premium of $56 billion for oil-indexed LNG contracts in 2019 and 2020 – how will this affect Australia as the number one supplier to this market?

Abstract

Increasing spreads between spot liquefied natural gas (LNG) and oil-indexed contracts have resulted in the world’s top three LNG buyers paying a cost premium of $33 billion in 2019 and 23 billion in 2020. The top three buyers are Japan, China and South Korea, which had a combined 151Mt of long-term LNG contracts indexed to oil in 2020. This cost premium shows what top Asian buyers are currently paying for the security of LNG supply through long-term oil-indexed contracts. However, it also shows the potential reward Asian buyers have if they manage to develop a liquid LNG pricing hub in Asia to which they can index their contracts. Japanese buyers’ efforts of increasing flexibility in contracts, both through take-or-pay agreements and destination flexibility and aims of growing the spot market, will increasingly support the liquidity of the LNG market. However, there will be resistance from the other side of the table, for where someone is paying a premium, or making a loss, someone is making money. 2020 was another year of plenty for LNG producers selling oil-indexed volumes to Asian markets. Australia is the largest seller of LNG to Japan, China and South Korea with over 60Mt of long-term LNG contracts indexed to oil in 2020. Australia has benefited from having their contracts indexed to oil, but what’s next? In this paper, Rystad Energy will discuss the future market for Australian LNG exports including development in LNG demand, contract trends and price spreads.