Petronas' LNG price reviews test market levels for long-term contracts

Malaysia's national oil company Petronas is conducting price reviews for some of its ongoing long-term LNG contracts with customers in Japan, South Korea and China, to bring them in line with prevailing market conditions, multiple traders and market participants said.

The price reviews are likely to see a handful of LNG contracts, which were signed at high slopes of 14.85% of crude oil or more, marked to market at slopes lower than 14% of crude oil to reflect recent deals and bringing some respite to utilities in East Asia, the traders said.

Several legacy LNG contracts in the Asia-Pacific region are pegged to a 14.85% slope of the crude oil price, which was a relatively high price as the market had few suppliers like Qatar and Australia, while US LNG had not yet emerged to lower global prices. Moreover, Australian LNG projects were some of the world's most expensive and needed high returns to break even.

In later years, the slopes started to decline to a range of 12%-16% depending on oil prices and competing LNG supply from new sources. A handful of Asian LNG importers had signed sales and purchase agreements or SPAs in the mid-14s when oil prices were low and oil-linked contracts were more attractive than spot LNG prices. Some of these were Petronas' Japanese customers.

In 2022, Malaysia was the second-largest supplier of LNG to Japan, while Japan emerged as the world's largest LNG importer despite a slight decline in year-on-year imports as China slipped to second place. Petronas remains one of the key suppliers to Japanese utilities.

Current price reviews have seen Petronas and Hokuriku Electric agree to an oil slope of 13.5% of the Japan Crude Cocktail, plus a 60-cent constant, applicable now, a market source said. This brings the contract price down from an oil slope of 14.4% for a 10-year contract starting 2018 for 0.30 million mt/year, S&P Global Commodity Insights and industry data showed.

Other Japanese customers like Hokkaido Electric are still in discussions, the person said. Hokkaido Electric also has a 10-year SPA with Petronas at the same price level.

South Korea, China

Some of Petronas' price reviews for 2023 were already concluded in the first quarter, while some are being actively negotiated and others are scheduled to commence in the second half of the year, market sources said.

Malaysia's South Korean customers have also engaged Petronas for price reviews. South Korea was Malaysia's third-largest LNG buyer in 2022.

Petronas' price reviews with Korea's largest gas importer Kogas and energy company GS were meant to be effective at the start of this year, but the companies are still in negotiations, and S-Oil is also in discussions with Petronas for term contracts, market sources said.

China was Malaysia's second-largest LNG customer in 2022 and has been taking a growing share of Malaysia's LNG exports. Petronas plans to start a price review with Shanghai Energy in 2023, and resume a review with local gas distributor JOVO that was deferred from 2022, market sources said.

Chinese customers had been seeking price reviews because some of these previously signed contracts were linked to LNG pricing, which was higher than the value of oil-linked contracts with 13%-14% oil slopes over most of the 2021-2022 period, according to a market source.

Oil-linked contract prices have been relatively opaque due to the lack of oil-linked SPAs in the last couple of years. During the COVID-affected years, contract slopes had dropped as low as 10%, but some recent contracts by Middle East producers like Qatar and Oman have seen slopes in the mid- to late 13% range.

Petronas is also not the only supplier conducting price reviews. LNG producers in Indonesia and Australia are also in talks with customers in Japan and South Korea. Australia remained Japan's single largest LNG supplier in 2022, accounting for over 42% of its total LNG imports.

Market levels

Price reviews may also be accompanied by changes to other contractual terms such as payment windows, destination clauses, seasonality and other volume adjustments. However, it was unclear whether these have changed in recent price reviews.

For Petronas, agreeing to lower slopes lowers revenue but it ensures that they are able to keep customers happy and their LNG-term contracts continue to perform, as opposed to seeking new buyers.

Long-term LNG contracts are typically signed with a provision for triggering price reviews in unusual market conditions that skew prices in favor of the buyer or the seller. But many contracts in recent years have built-in price reviews at regular intervals due to rapidly changing market conditions -- such as record low spot LNG prices and volatile crude prices.

Evolving price review mechanisms also signal the commoditization of LNG as liquid commodities like crude oil or refined petroleum products have a higher frequency of price review discussions. Price reviews allow contracts to be rebalanced without the need to go into arbitration or litigation.