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Vitol-Cheniere Pact Shows Long-Term LNG Deals Aren’t Dead

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September 18, 2018

Photo: Wojciech Wrzesien / Shutterstock

By Naureen S. Malik, Anna Shiryaevskaya and Andy Hoffman (Bloomberg) — Developers of multibillion-dollar liquefied natural gas export terminals from the U.S. to Australia can breathe a sigh of relief: A supply boom hasn’t killed the long-term contracts that underpin the projects.

Cheniere Energy Inc., America’s first and biggest shipper of shale gas, struck a 15-year agreement to sell the fuel to commodities trader Vitol Group, according to a statement Monday. The pact is Cheniere’s fifth this year. Venture Global LNG Inc., which is developing a terminal in Louisiana, has finalized four such contracts over that period.

The Cheniere and Venture Global deals signal better odds for more than a dozen North American gas export proposals vying for similar commitments, which are needed to secure financing. The global supply glut had stoked concern that buyers would seek shorter pacts: Most of the LNG contracts signed in 2017 were for two to five years, data from Poten & Partners Inc. show.

“We still need long-term contracts to launch projects,” Mike Sabel, co-chief executive officer and founder of Venture Global LNG, said at the Gastech conference in Barcelona Tuesday. “It is not going to change in the foreseeable future.”

Though there has been speculation that the “long-term contract is just dead and it needs to be three to five to 10 years,” deals of more than 15 years’ duration are sticking around, Greg Vesey, chief executive officer of developer Liquefied Natural Gas Ltd., said in an interview at Gastech.

Some buyers have a “strategic objective to take 20-year contracts to ensure that the facility gets built,” said Vesey, whose company plans to build the Magnolia LNG export terminal in Louisiana.

Cheniere shares fell 1.3 percent to $64.77 in New York on Monday amid a broader market decline.

That U.S. deals are getting done is a testament to how quickly the country is rising in the ranks as a global gas supplier. Since early 2018, a second wave of projects set to bring more than 10 million tons a year of the nation’s LNG to market under sales and purchase agreements has reached the starting blocks, according to energy consultants Wood Mackenzie Ltd.

“The increase in SPAs is remarkable,” said Kristy Kramer, head of Americas gas research at Wood Mackenzie.

Traders including Vitol are trying to lock in long-term supplies of the super-chilled gas as power plants burn more of it and as demand increases from buyers like China, the world’s fastest-growing LNG importer. Geneva-based Vitol, the biggest independent oil trader, now handles about 10 million tons of LNG a year, and the Cheniere deal was its first long-term pact to buy the fuel.

Vitol will buy about 700,000 tons of LNG per year from Cheniere Marketing LLC, the companies said. The purchase price for the LNG will be indexed to the monthly gas price at Henry Hub in Louisiana and will also include a fee, they said.

The contract means Vitol can offer flexibility to its clients on a long-term and short-term basis, Pablo Galante Escobar, head of LNG at Vitol in Geneva, told reporters in Barcelona, where the deal was signed on the sidelines of the Gastech conference.

Cheniere has been drawing in new customers after signing up major utilities and integrated oil giants to build its Louisiana and Texas terminals. The Houston-based developer, which is expanding both sites, also minted deals with trading house Trafigura Group Pte Ltd. earlier this year, as well as China National Petroleum Corp. and Taiwan’s CPC Corp.

LNG will be supplied from Cheniere’s marketing portfolio, from the company’s Sabine Pass or Corpus Christi terminals, Cheniere’s chief commercial officer Anatol Feygin said in Barcelona.

“I don’t think it will be our last deal,” Vitol’s Escobar said. “Hopefully we will do more, with Cheniere, and other companies.”

© 2018 Bloomberg L.P


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