Contracted LNG supply linked to the price of oil — a practice dating back to the 1970s — is currently much lower than the cost of buying a shipment from the spot market. But that discount is shrinking as available supplies dwindle.
War, the energy transition, severe weather and surging demand are creating a period of upheaval that is tightening supply like never before in the natural gas industry. The global LNG market could be short nearly 100 million tons per year by the middle of the decade if the world moves to cut Russian gas, according to a Credit Suisse report last month.
Pricier long-term LNG contracts threaten to boost electricity and heating rates, adding to inflation fears. It could also make the fuel unattainable for some cash-strapped emerging nations, like Pakistan.
Suppliers including major producers and portfolio players are offering to sign 10-year LNG deals that start next year at 16%-18% of the price of Brent crude. For comparison, Qatar was signing supply agreements to Chinese customers in the low-10% range early last year. Beijing Gas Group Co. inked a deal just below 13% this January.
While no deal has yet to be signed at 18% the price of Brent, such a rate would likely be among the most expensive ever signed, according to traders.