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Short term contracts might be detrimental for the future of natural gas

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The global glut of natural gas and the ensuing low prices make it a buyer’s market, and the buyer’s want bargain-priced shorter supply contracts.

“Gas buyers have become too focused on the short-term, turning away from long-term contracts,” commented Greg Vesey, chief executive officer of Australia’s Liquefied Natural Gas Ltd.

This lack of long-term supply contracts is changing the natural gas industry’s outlook for investments. Last month saw Malaysia’s state-run Petronas pull out of a $27 billion project to build a large liquefied natural gas facility on the western coast of Canada. The last large scale liquefied natural gas facility was built in 2014, and this is becoming standard across the industry. Companies are building smaller and more efficient facilities to handle the smaller contracts.

Major natural gas players like Cheniere Energy Inc. and Tellurian Inc. have terminals in the works that are roughly a third of the size of existing terminals. Other companies, including Petronas and Royal Dutch Shell, are looking offshore to build small floating facilities to save money.

The downside to these smaller facilities is that eventually demand will outstrip their ability to produce.

Vesey added, “If they keep it up and don’t lock in enough contracts next year to encourage the construction of more export terminals, the market could end up short supplies as soon as 2021. Things come to a head in late 2018. By the end of 2018, people will realize they have to make a decision.”

Right now, the state-run Chinese energy giants are among the few buyers looking for 20-year contracts. Asia is a huge market for liquefied natural gas with Northeast Asia being the world’s largest regional consumer of liquefied natural gas. However, the demand in the area has dropped roughly 70% since its peak in early 2014.

“The reality is that a new facility needs to be backed by a 20-year contract,” Kathleen Eisbrenner, chief executive officer of export terminal developer NextDecade Corp., said. “There is starting to be a realization that, if those contracts aren’t signed soon, we will go into a shortage.”

The Texas liquefied natural gas exporter Cheniere Energy is having similar problems finding long term buyers to back their new export terminal near the Louisiana and Texas border. Anatol Feygin, the chief commercial officer of Cheniere Energy said that there seems to be a, “good appetite among buyers to lock supplies for three to seven years rather than 20.” He added, “market conditions continue to be challenging for long-term deals”

Australia and the United States are flooding the market with natural gas. Experts believe that the supply glut is so bad that it won’t dissipate until at least the mid 2020’s. This means more future projects will be put on hold indefinitely.

The future of the natural gas market is in flux, and presently it is becoming more cutthroat in trying to attract potential long-term customers, causing “ridiculously low prices,” according to Vesey.

Article written by HEI contributor Raymond Arrasmith.

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