The Balancing Act: Long-Term Stability and Market Flexibility in LNG Contracting

North America's LNG export capacity is projected to more than double by 2028, underscoring the region's expanding influence in the global LNG market. This growth, driven by contributions from the United States, Canada, and Mexico, not only meets the surging global demand but also significantly alters contracting practices. Despite a notable shift towards short-term contracts influenced by market pricing and buyer strategies, the article details how long-term contracts continue to play a crucial role in securing financial stability and supply security for the region's burgeoning LNG export capabilities.

Growth and Expansion in North America

North America’s LNG export capacity is projected to more than double by 2028, growing from 11.4 billion cubic feet per day (Bcf/d) in 2023 to 24.4 Bcf/d. This substantial increase, contributed by the United States, Canada, and Mexico, emphasizes North America's strategic role in global LNG supply dynamics. This expansion not only meets rising global demand but also influences contracting practices. [2] NGI is currently tracking at least 246.6 mmty in proposed LNG export projects in the United States that haven’t gone to a final investment decision. Another 79.1 mmty is currently under construction, with additional volumes expected to hit the market as soon as the first half of next year [3].

As North America, particularly the United States, solidifies its position as a leading LNG exporter, it bolsters the region's capacity to conduct negotiations for both long-term and flexible contracts. This enhances the variety of contracting options available to international buyers and reinforces global supply security.

Low Prices and the Spot Market 

The dynamics of the LNG market are greatly influenced by periods of low prices, which enhance buyers' negotiation power over terms such as prices, delivery schedules, and destination clauses. This leverage can lead to a shift from traditional long-term contracts to more flexible, short-term arrangements and spot market purchases, depending on buyer expectations about future price trends. For instance, in 2023, the trend towards short-term contracting was evident, yet 45 long-term contracts were signed globally, indicating that while buyers enjoy more favorable terms due to lower prices, they still commit to long-term deals to secure future supplies [3].

Influence of Futures Market on Contracting Dynamics

The natural gas futures market also impacts LNG contracting practices. Currently, the futures market is in a state of contango, where prices are projected to rise. Specifically, the market anticipates higher natural gas prices for the next winter (Dec 2024–Mar 2025), with an increase of over 82% expected through winter 2025–26. This situation indicates market expectations for demand to outstrip supply, reflecting a decrease in the natural gas surplus relative to the five-year average (2019–23) due to slowing production. Simultaneously, demand is expected to rise as new LNG terminals come online. This foresight into future market conditions provided by the futures curve helps stakeholders make more informed decisions about entering into long-term agreements versus relying on spot market transactions [5].

Source: U.S. Energy Information Administration – Influence of Futures Markets on LNG Contracting

The Strategic Importance of Long-Term Contracts

Long-term contracts have traditionally been a cornerstone of the LNG industry, often spanning multiple decades. These contracts are crucial not only for stabilizing cash flows but also for de-risking potential expansion projects. For instance, pricing structures within these contracts usually link the sale price of LNG to a global gas benchmark plus a liquefaction fee, providing predictability in revenue streams despite market fluctuations.

Long-Term Contracts Anchor Stability in the LNG Market

Despite a trend toward shorter contract durations and enhanced flexibility, the LNG industry steadfastly depends on long-term agreements, which are crucial for securing financing and stabilizing major projects. In 2023, U.S. developers secured 17 long-term agreements. This year, Shell established a long-term contract with Turkish energy company BOTAS, starting in 2027, underscoring the ongoing necessity of such agreements for maintaining stable supply and market conditions. Adding to this trend, Texas LNG Brownsville, a Glenfarne Energy Transition subsidiary, signed a new Heads of Agreement this month, acquiring sufficient offtake commitments, including a pivotal long-term contract with an undisclosed investment-grade global LNG player, to move forward to a final investment decision (FID). [6] Bloomberg New Energy Finance projects that long-term contracted LNG volumes will increase from 72.7 million metric tons per year (mmty) in 2023 to 112 mmty by 2028 [3].

While short-term contracts provide necessary flexibility and respond to immediate market demands, long-term contracts remain indispensable for the foundational financial security they offer to LNG projects. These agreements facilitate the development of critical infrastructure essential for meeting global energy needs, particularly as the industry navigates through regulatory challenges and economic uncertainties.

References

1. 1. International Group of LNG Importers (GIIGNL). “Annual Report on Global LNG Market.”
   2. S. Energy Information Administration. “North America’s LNG export capacity set to double by 2028.” EIA Report.
   3. Natural Gas Intel. “LNG exporters sign long-term contracts to secure demand.” NGI Article.
   4. S&P Global. “LNG market dynamics and pricing trends.” S&P Global Report.
   5. S. Energy Information Administration. “Influence of Futures Markets on LNG Contracting.” EIA Report.
   6. Texas LNG Brownsville secures another offtake deal; advancing towards FID