Buyers Demand Flexible, Cost-Effective LNG Terms Post-Hormuz Event
Asian and European buyers of liquefied natural gas (LNG) plan to ask for lower prices and additional supply guarantees from Qatar and the United Arab Emirates as the U.S.-Iran war raises insurance costs on those deliveries, buyers, traders and industry executives told Reuters.
The war is reshaping the global energy industry, stripping Gulf producers of their reputation as the world’s most reliable suppliers, which in the past gave them significant negotiating power. Their ability to set their own conditions has weakened because the war has halted most oil and gas flows through the Strait of Hormuz, the shipping chokepoint at the entry to the Middle East Gulf.
Qatar’s vast reserves helped the country become the dominant force in the global gas market. It and the neighbouring UAE, where production volumes are increasing, account for around one-fifth of global LNG export capacity – all of which relies on the strait to reach global markets.
Qatari LNG has been among the most competitively priced due to the country’s low production costs, while the UAE offers more flexible terms. However, buyers say the higher risk and rising insurance costs will give them leverage in future negotiations to further drive down costs and request even more flexibility.
“Anyone entering into new contracts in the Gulf region will also have to take into account potential insurance costs, which are set to increase,” Nicola Monti, chief executive of Italy’s Edison (EDNn.MI), told Reuters on the sidelines of a recent business event.
Long-term LNG contracts from Qatar and the UAE were typically priced at 12.6%-12.7% of the Brent crude price before the Iran war, but some deals signed since have been concluded closer to 12.3%, suggesting buyers were already seeking to factor in the higher regional risk, one industry source said.
The war has forced QatarEnergy to shut liquefaction trains, declare force majeure on deliveries and suspend exports. The resumption of Iranian attacks this month on tankers transiting the strait has clouded the prospects for a return to pre-war flows.
Edison, which has a long-term contract for 6.4 billion cubic metres of Qatari gas a year — around 10% of Italy’s annual demand — has had deliveries cancelled from April until early September under force majeure.
QatarEnergy and Abu Dhabi’s state energy company ADNOC did not respond to Reuters requests for comment.
ASIAN BUYERS REASSESS RISK
Future Gulf gas deal talks would focus on reducing prices but also raising the security and diversification of supply, six Asia-based traders said. They spoke on condition of anonymity due to the sensitivity of the matter as their companies have long-term contracts with Qatar and UAE.
The pair may also have to lower prices as growing production from the United States, Canada and Mozambique adds to competition, one of the six traders said.
Qatar can produce LNG for as little as $0.50 per million British thermal units (mmBtu), analysts estimate – compared with $3-$5/mmBtu in many competing projects worldwide – due to its massive reserves and relatively low labour costs. Qatar and the UAE’s proximity to Asian markets means they pay less for shipping.
Both also plan to further expand their LNG output in the next few years, meaning buyers would have more opportunity to bargain for discounts, traders said.
Purchasers will further want Qatar and the UAE to provide guarantees of replacement cargoes if exports through Hormuz are disrupted, for example from projects elsewhere such as Qatar’s Golden Pass LNG terminal in the United States.
“Going forward (Gulf suppliers) will have to contend with a new risk profile stemming from what happened in the Strait of Hormuz and from the fact that nobody can rule out the possibility of a recurrence in the future,” Edison’s Monti said.
Reporting by Marwa Rashad in London, Emily Chow in Singapore, Francesca Landini in Milan, and Nidhi Verma in New Delhi; Additional reporting by Emily Ou Yong in Singapore; Editing by Nina Chestney and Kirsten Donovan
This article was first reported by Reuters
