LNG has historically been priced to an oil price marker. This is because until recently, LNG has been a point-to-point business - LNG was produced in one country and shipped under a 20-30 year contract to a single destination and the LNG tanker would shuffle back-and-forth between the two end points. This underpinned the project financing for construction of liquefaction projects.
LNG prices were then linked to oil as both the LNG producing nations and importers typically had no mature domestic gas market, and hence no price discovery for the gas, but for the importing country, the LNG would have displaced oil for power generation.
Since the genesis of North American LNG, US Gulf Coast exports have been priced to Henry Hub ("HH"), with contracts being HH plus a liquefaction toll. However, buyers are starting to shift to being overweight HH contracts and the last few weeks have seen the first set of contracts away from HH linkage.
On 2nd April, NextDecade signed a 20 year SPA to deliver LNG from its Rio Grande facility with Shell. The pricing is c.75% linked to Brent with the remainder linked to HH, on a FOB basis. First LNG is planned to be in 2023. This was the first-ever LNG contracts out of the US to be indexed to Brent and comes with full destination flexibility.
On 5th April, Shell went one step further by agreeing to sell LNG to a Japanese utility with a linkage to coal prices and is the latest innovation to help buyers seeking to diversify risks. This contract is for 10 years and is the first ever coal-linked contract.
