Forced with dramatically increasing numbers of potential LNG
suppliers, LNG buyers are increasingly reluctant to sign long-term
take-or-pay contracts with prices indexed to oil. LNG buyers today
seek shorter term flexible contracts based on natural gas prices in
the final market. This will have a direct impact on the financing
of new LNG projects due to changes in the risk profiles of projects
that follow the new LNG trend. Below is an analysis of the
traditional and the new LNG trades, including their different risk
profiles, and the financing impacts of each structure. Structural
differences in two important gas markets, the US and European, are
evaluated in their different risk profiles as LNG destinations.
Traditional vs. New LNG Trade
Traditional LNG trade is based on long-term take-or-pay Gas Sales
and Purchases Arrangements (GSPA) with standard commitment terms of
over 20 years1 and with pricing formulas fixed for the entire life
of the contract. Whereas GSPAs give buyers comfort with regards to
supply reliability and pricing, such contracts include very low or
no volume flexibility2. Some long-term contracts have even included
minimum price provisions to lock in secure minimum revenues.
Offtakers in traditional LNG contracts have been high investment
grade credit-worthy entities, giving lenders more certainty about
the quality of the credit.
The 1998 Asian financial crisis had a dramatic impact on the LNG
industry. Asia's largest LNG buyers, which include South Korea,
Japan, and Taiwan, are traditionally signatories to GSPAs with
fixed prices and shipping terms. Due to the drop in energy
consumption during the Asian crisis period, Korea curtailed some of
its committed take-or-pay gas deliveries in contravention of its
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