Tellurian-Vitol LNG deal signals shifting balance of power

The preliminary LNG offtake agreement announced on December 6 between export developer Tellurian and trader Vitol, marks a conspicuous shift in the balance of power in LNG contract markets. The memorandum of understanding calls for Vitol to lift 1.5 million mt/yr, equivalent to nearly 70.1 Bcf/yr of gas, on an FOB basis from Tellurian’s Driftwood LNG-export terminal over a 15-year term. What makes the otherwise routine supply agreement so consequential is that Vitol’s purchase price is actually linked to a destination market price in northeast Asia—the Platts JKM. It is among the first, if not the only such agreement in the global LNG market. For the buyer Vitol, the deal dramatically reduces market risk since its contracted LNG-purchase price effectively includes a built-in margin for profit. While Vitol pays more for LNG as the JKM rises, it also pays less as the benchmark index declines. If that destination-market linkage wasn’t compelling enough, the agreement also includes a shipping component, further reducing the risk imposed by fluctuating charter rates in the global freight market. Export margin In recent weeks, volatility in LNG-import and shipping markets, and even in the US onshore gas market, brings some perspective to those contract terms. In… continue reading

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