Historic Oil Meltdown Gives LNG Importers Relief

(Bloomberg) -- The rout in oil prices may well put a smile on the faces of liquefied natural gas buyers.

Most of the world’s LNG is still sold under long-term contracts indexed to oil, which has remained a widespread practice since its inception in the 1960s. That means that some of the biggest importers -- including Japan, China and South Korea -- largely missed out from record low spot prices triggered by a milder winter and the startup of new supply.

Oil’s collapse in the wake of an all-out price war between Saudi Arabia and Russia has changed the picture. An LNG contract with a 12% slope to Brent crude is currently at a premium of about $1.17 per million British thermal units to Asian spot prices, down from more than $4 just three weeks ago.

To be sure, the premium is based on the Friday close of Japan/Korea Marker futures. The Asian spot price, which hasn’t been assessed yet on Monday, is expected to fall -- albeit at a smaller rate than oil -- as a knock-on effect.

The wide price discrepancy had triggered some importers to rethink long-term contracts. State-owned Pakistan LNG Ltd. is weighing the possibility of exercising termination clauses in contracts signed with Eni SpA and Gunvor Group Ltd. in 2017, while Japan’s Osaka Gas Co. entered into arbitration last year with the marketing unit of Exxon Mobil Corp.’s PNG LNG project after a dispute during a price review.

To contact the reporter on this story:
Stephen Stapczynski in Singapore at sstapczynsk1@bloomberg.net

To contact the editors responsible for this story:
Ramsey Al-Rikabi at ralrikabi@bloomberg.net
Rob Verdonck, Aaron Clark