a collaborative approach to lng price negotiations through ... · • point to point sales -...

© ChevronTexaco 2005

A Collaborative Approach to LNG Price Negotiations Through Unbundled Prices

GASTECH 2005Bilbao, SpainMarch 16, 2005

Stephen Del Regno, Managing Director

W. David Meierding, Senior Business AnalystChevronTexaco International Gas Inc.- Japan Office

Del Regno/Meierding, 2

Objectives of LNG Price Negotiations

For Seller:

• Recover project capital and operating costs with acceptable return

• Capture optimal value while being competitive with price offerings of other projects

For Buyer:

• Competitive and prudent cost of fuel, lower total fuel cost

• Provide stable, long-term, competitively priced LNG supplies

For Both:

• Long term robustness under a wide range of market environments over the contract term

• Allocate price and volume risk between buyer and seller


Evolution of the Asia LNG Price Regime

Conventional formula:

PLNG = β (PCrude Oil) + α

β = slope (thermal equivalence to crude oil, historically set at 0.1485)

P = price of crude oil (typically JCC)

α = constant term (varies across contracts)

Evolving formulae:

• Fixed Price/Cost recovery

• Official government selling price (OGSP)

• JCC price basis• “S” curves

• Discontinuous slopes/multiple kink points

• Floors and ceilings• Devolution of 0.1485 slope• Two-part prices


All LNG Deals Are Not Alike

• greenfields or brownfield

• contract extension or new contract

• number of trains and size

• local fiscal regimes

• associated liquids

• NOC involvement in project

• liquefaction plant location

• customer location

• delivered or ex-ship

• floor / ceiling / S-curve

• ship charter or newbuild

• slope or flat

LNG Sales Purchase Agreement

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• ramp-up

• wedge volumes

• upward quantity tolerance

• downward quantity tolerance

• annual contract quantity

• destination flexibility

• diversion conditions

• tranche pricing

• length of term

• price reviews

• optional extensions

• LNG specifications

Etc., etc., etc…


Asia’s LNG Business is Undergoing Major Changes…

A small club

• 3 countries behaving like 3 buyers

– Each country’s appetite for LNG determines demands

– Supply security paramount

• North America was not a factor

• Asia Pacific was independent of the Atlantic Basin

• Investment and control of infrastructure mainly by producers, NOCs

More diverse buyers

• New buyers & different types of buyers in Japan, Taiwan, Korea, plus India and China

• NAWC is a potential player – NAEC, GOM and Europe are already able to siphon off ME supplies

– Asia Pacific and Atlantic Basin are becoming linked (via ME swing producers)

• Deregulating markets increasing the number of competing buyers

• Buyers increasingly interested in upstream, shipping and terminal investments (for risk diversification, attractive returns, business opportunity)—buyers are becomingsellers

From the Past To the Future



A single rigid model for contracting terms

• Point to point sales - integrated bilateral value chain

• Long term contracts

• Same terms for gas and electric utilities

• TOP, limited flexibility contracts

• DES is the norm

• In-country infrastructure all built by buyer’s government or regulated large companies

Emergence of more diverse contracting terms

• One liquefaction project to multiple users in multiple countries

• Shorter terms (mid term, spot), emergence of swaps

• More flexible terms (less rigid TOP, destination flexibility, seasonal deliveries)

• Changes in price indexation & differentiation based on requirements (i.e., flexibility, term, seasonality)

• FOB more common




Balance of power with sellers

• Continuously strong demand growth

• New projects sequenced by suppliers to meet new demand (market discipline)

• No gas-on-gas competition

• Potential supply overhang was always in the future

• New demands emerge in large increments – new supply in small(er) increments

Balance of power shifting to buyers?

• Potential supply overhang emerging? (Qatar, Tangguh, Tiga, Sakhalin, Gorgon, Yemen, Iran)

• Speculative capacity in most new projects

• Deregulating markets forcing buyers to focus on price & competitiveness

• Long-term contracts expiring

• New demands in small increments – new supply in ever larger increments



• Target terms and conditions to specific markets, customers or

customer groups (e.g., electric utilities, city gas utilities, IPPs, etc.)

• Develop mechanisms to consider and capture value of volume

and seasonal flexibility

• Measure and understand net-back price risk (e.g. NAWC,

NAEC and GOM, etc.)

• Capture costs and value of cargo diversions and destination freedom

• Resolve the Buyer’s exposure risk at high levels of crude

prices and manage Seller’s exposure to low crude prices

Collaborative Price Negotiations


Collaboration – Can It Work in Price Negotiations?

• New ideas and concepts, reflecting the emerging industry realities, but tempered by historical perspective

• Seller and Buyer collaborate to develop ideas together

• Result is a long-term sustainable commercial structure tailored to Buyer’s requirement while considering Seller’s needs and market benchmarks

a collaborative approach to lng price negotiations through ... · • point to point sales -...

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