ICIS Global Crude Oil Deputy Editor Julien Mathonniere looks at the future oil indexation as a pricing mechanism for LNG contracts.
The onslaught of new LNG supply, especially from the US, Qatar and Russia is challenging the legacy of oil indexation as the main pricing mechanism for LNG contracts. By diversifying their supply strategy, a small clique of gas sellers has brought more flexibility to contractual arrangements and put new business practices into relief, notably from large portfolio players. With more LNG volumes sold on a spot basis, the price spread between regional markets is becoming a key value driver. Long-term, oil-indexed contracts, however, continue to tie LNG prices to capacity development. LNG project developers need certainty about future cash flows, while buyers want competitive prices in their respective markets. Oil indexation may be fading, but it is yet unclear how new LNG capacity will come on stream without at least some degree of indexation.
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