European firms remain wary of long-term LNG supply contracts despite the sharp increase in LNG demand after the curtailment of Russian pipeline flows, industry experts told the Flame conference in Amsterdam this week.
"Long-term LNG contracts bring risks," head of continental Europe merchant trading at Axpo, Marco Saalfrank, said. There are risks in volume, for example the risk of Russian supply returning to the continent in 10-15 years, or the risk of gas demand falling faster than expected over the next decades, he said. And there are also price hazards because hedging at the back of the curve is harder, Saalfrank said.
As a result, European buyers largely hold fob offtake — rather than long-term des supply — which can be diverted to Asia if demand is weak. UK-based chemical firm Ineos only has 12pc of its long-term needs contracted and it is more exposed to competition for LNG cargoes with Asian firms, head of LNG at the firm's energy trading arm, Nicola Duffin, told the conference. The firm follows Asian LNG prices more closely than the Henry Hub, she said.
Europe's reticence to commit to long-term supply makes the financing of new US LNG exporting facilities harder, according to the chief executive of Gulfstream LNG, Vivek Chandra. "LNG is bullish everywhere else but Europe," Chandra said. But those emerging countries expected to lead demand growth in the coming decades still lack the financial means to take on long-term contracts, he added.
In any case, some progress has been made. Europe needs a lot of LNG to replace Russian gas, so there is a big gap that has not been contracted, but some new long-term contracts have been signed, the vice-president of strategy at Cheniere Andrew Walker said.
