CAMPEONATOS PROVINCIALES Y DE CANARIAS POR EQUIPOS DE CLUBES

Long-term contracts have all but disappeared in the restructured North American and UK onshore gas markets, and there have been strong efforts to open gas markets within the rest of the European Union. There is also substantial pressure to make LNG contracting more flexible, but suppliers have shown a great reluctance to proceed with a new project without some degree of long-term contract protection. Thus the industry reliance on long-term contracts seems likely to remain and act as the

‘filter’ that determines the flow of new projects into the market.

The restructuring of gas and electric markets in North America and in the UK has substantially changed the way in which long-term contracts are written for those markets. Short-term contracts now predominate in the North American domestic market, and those long-term contracts that exist utilise gas market price indicators, such as Henry Hub. While long-term contracts still cover the largest existing volumes on the UK beach, the National Balancing Point is emerging as the new pricing standard in the UK.

Where once the major pipeline systems in North America, or British Gas in the UK, were the obvious potential buyers of LNG, their merchant monopoly status has now been eliminated. Buyers are now commonly smaller and much more sensitive to price competition. By seeking to minimise their market risks by relying on gas market indicators, they have effectively transferred more of the project risks to the sellers. The response of the sellers has increasingly been towards ‘self-contracting’ with their own marketing affiliates, effectively integrating downstream to sell directly to smaller re-sellers or end users.

In self-contracting, one or more of the partners in the venture (or their marketing affiliates) sign the SPA with the venture and assume the marketing risk for the contracted volumes (see Figure 46). The resulting volumes commonly become part of the seller’s supply portfolio and can be sold under any terms and conditions that he chooses to utilise. Particularly in North America and the UK, where spot markets dominate onshore gas trade, self-contracting permits the seller to participate in this market. Self-contracting has become extremely important in the Atlantic Basin largely because of the competitive nature of North American markets. Traditional contracting is still the dominant pattern in Northeast Asia and remains important on the European Continent.

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Figure 46:  The Newer ‘Self-contracting’ Approach to LNG Marketing  Compared to the Traditional ‘Destination Contract’

The Traditional "Destination Contract"

"Self-contracting"

Utility Buyer Venture Marketer Venture Partners

Customers The Sale &

Purchase Agreement

Source Jim Jensen

Despite the continuing reliance on long-term contracts, these changes in contracting patterns have made the LNG market increasingly flexible. The new flexibility has come about in two ways – (1) a small, but growing, short-term market, and (2) the growing importance of ‘self-contracted’ volumes.

A small ‘short-term’ market in LNG has existed for some time. Despite the rigidity of long-term contracts, buyers have swapped cargoes from time to time as one customer found himself temporarily long on supply while another was temporarily short. But these balancing trades have been quite different from the active merchant spot markets that operate at Henry Hub in the US or the National Balancing Point in the UK. However, a true spot market in LNG cargoes is increasingly developing and introducing flexibility into LNG trade. Figure 47 shows the growth of short-term trading in LNG.

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Figure 47:   LNG Trade Showing the Growing Role of Short-term Sales (Bcm)

0 25 50 75 100 125 150 175 200 Bcm

Short-term Volume Contract Volumes 1.4%

2.5%

7.7%

5.5%

11.6%

1992 1995 2000 2004

Short-term volumes, while growing rapidly, are still small

Source: Jim Jensen

The traditional contract can be described as a ‘dedicated contract’, where the contract designates the destination of the cargoes. Self-contracting gives suppliers destination flexibility that was not available under the traditional contracting system. The ultimate market destinations are defined, not by the terms of the contract, but by the best netbacks available to the supplier, given his portfolio of liquefaction and re-gasification assets. Some idea of the importance of these new flexible volumes is the proportion of the estimated firm and probable capacity for the year 2010 that is still committed to destination contracts, versus that which remains flexible – either as uncommitted or self-contracted volumes (see Figure 48).

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The Middle East remains the most dependent on the traditional long-term contract, but much of its focus has switched from the Pacific Basin to the Atlantic Basin. The Atlantic Basin has become the major LNG arbitrage market, with cargoes being shifted between Nigeria and Trinidad on the one hand and the US and Spain on the other. The UK’s growing LNG imports will make it an important arbitrage partner in the future. The Pacific Basin also shows a large flexible volume in 2010. This is a product of competitive expansion of new greenfield facilities, coupled with major contract expiration later in the decade.

The new destination flexibility has raised an additional issue. The regulatory authorities in Europe and North America applaud the new flexibility since it facilitates more liquid markets, and they have been anxious to eliminate ‘destination clauses’ in contracts where they still apply. But supplier governments have at times become upset since they may not participate in the additional rents that are possible from freer trading. There have, therefore, been some efforts by supplier governments to develop a rent-sharing mechanism between government and the marketing companies.

Rent sharing in the world of price arbitrage is an issue both for the international partners in the project as well as the government. Agreements generally assume a certain market pattern and

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