PF Archive

Flexible friends

01 12 2002

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 contractual terms....