SINGAPORE: The liquefied natural gas (LNG) market will see a growing need for medium-term and customised deals amid concern among some buyers about the price risks of long-term contracts and conflict with decarbonisation goals, an executive with global trading firm Vitol said on Thursday.
Approximately 70 per cent of LNG globally is estimated to be sold via long-term contracts which typically run between 10 and 25 years. Medium-term contracts usually run for three to five years.
A global goal of achieving net-zero carbon emissions by 2050 have left many countries unwilling to commit to such contracts recently, notably in Europe where spot and short-term contracts represent around 45 per cent-50 per cent of LNG trade.
A disagreement over duration of contracts has been one of the key issues in talks to secure LNG supply from major producer Qatar to Germany, which is significantly counting on LNG as one of the means to phase out Russian gas.
"We've had so many people talking about net zero ... You're going to finish (contract) duration and go into a period where LNG is on the decline." Sid Bambawale, head of LNG Asia said at Asia Pacific LNG and Gas Summit in Singapore.
Spot market buying, where deals are usually more expensive than for long-term agreements, does not work for every buyer who may need specific price requirements or the ability to cancel a deal, he said.
"All this makes it a more customised space in that transition. We're seeing there is a role in the medium term as you transition from high spot prices to long term."
Other executives echoed the same message and said that the decarbonisation goal in some Asian countries, like major LNG importer Japan which has a net-zero emissions target by 2050, makes it difficult for its major buyers to buy classic, long term bulk contracts if they begin the procurement now.
"As the tail end of the contracts would hit the 2050 mark, they have to do something about it.… So there's a middle ground that the end buyers, especially in Japan, need to look at," said Gen Kunihiro, chairman and chief executive of Diamond Gas International.
Generally, gas producers want long-term commitments for capacity expansions at capital-intensive projects.
Robert Songer, LNG analyst at data intelligence firm ICIS said that the shift to medium-term contracts should not be surprising, given the increase of trading companies taking long- term contracts as their business model which is maximising value from market opportunities.
He added that many portfolio players like BP, TotalEnergies and Shell have been using their vast portfolios to do the same in recent years.