Does the Portfolio Business Model Spell the End of Long-Term Oil-Indexed LNG Contracts?

Historically the cornerstone of the LNG industry has been the long-term oil indexed contract with restrictions on destination flexibility. However, market liberalisation in North America, the UK and Northwest continental Europe, the temptation to make contracts more flexible to capture arbitrage upside and large volumes of destination flexible US LNG under development – have encouraged the rise of ‘portfolio players’ applying advanced trading optimisation skills to their ‘webs’ of supply sources and destination markets to derive additional value through supplying non-supply source specific LNG to buyers.  LNG traders have also developed a similar, more ‘asset-light’ version of this model.

The paper argues that, despite the challenging period to 2021 with a soft market or ‘glut’ of LNG, the majors amongst the portfolio players are well placed for the next wave of new supply projects in the mid 2020s, due to the synergies from existing positions, advantaged cost of debt and more flexible contracting/sales and pricing strategies.

With the uncertainties concerning future Asian LNG demand growth, the wane of oil indexation as a workable pricing mechanism in Asia and the perhaps more modest scale of the mid 2020s LNG supply growth wave, this could see non-Majors and energy sector banks ‘left on the starting blocks’ if they do not adapt to this transition.

Executive Summary

By: Howard Rogers

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