• LNG Spot Cargo Trading - Market Trends and Challenges
  • March 30, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction
    The LNG spot and short-term market has increased exponentially over the last 10 years and now represents 20 per cent of the total global market for LNG. The total volume of LNG traded globally reached 223.8 million tonnes per annum. According to a recent paper published by Poten & Partners, short-term LNG trade volumes are projected to increase at an average rate of 11 per cent per annum for the period up to 2015. This growth rate is higher than the total growth rate for the LNG market, which British Petroleum estimates will be 7 per cent per annum; thus the proportion of short-term LNG trades is set to grow.


    Key players
    The purchase of spot cargoes in the last couple of years was mostly by Northwest Europe (in particular, the UK) and Asian countries such as Japan, Korea, Taiwan and China. Japan has been scooping up large quantities of LNG in 2011 for power generation, after the Fukushima earthquake paralyzed several of its nuclear power plants. Korea, requiring cargoes mainly for heating during winter months, has been a major participant in the short-term and spot market. Taiwan and China are catching up. Although China’s activities in the spot cargo trade have been noticeable in recent years, further growth is likely to be limited due to restrictions in access to terminal and pipeline facilities in China, its inability to pass on the market price to the heavily regulated domestic gas market, and recent hikes in shipping costs.

    In terms of LNG suppliers, in addition to the traditional resource-back suppliers such as Qatar, Australia, Indonesia, Trinidad and Nigeria, increasing numbers of multi-national oil companies, national oil companies and investment banks are setting up trading houses in major trading hubs such as London, Houston and Singapore to service LNG spot cargo customers from Europe and Asia. The prospect of East Africa (Mozambique and Tanzania) becoming LNG exporting nations has attracted attention in the market. The rise of East Africa as LNG exporting nations will in no doubt present a welcome alternative for LNG buyers.


    Factors driving the LNG spot cargo trade
    Traditionally, the LNG market was dominated by long-term off-take contracts. Without such arrangements it would not have been possible to make the significant capital investments in extraction, transportation, storage and re-gasification that are all necessary to build the LNG supply chain. Such arrangements offer very limited rights to upward and downward quantity adjustments and little, if any, cargo diversions.

    As the demand and supply of gas is influenced by factors including weather conditions, seasonal gas consumption peaks, delay in or disruption of gas domestic production or power supplies, price and availability competing fuels, and growing demand for cleaner and safer energy fuel, the spot and short-term LNG trade offers the flexibility to fill in the gaps caused by the supply shortages and to arbitrage prices between alternative LNG markets.


    Shipping is a key component in the LNG supply chain. As the cost of building an LNG carrier is many times more than building an ordinary vessel, owners of LNG carriers prefer to support investment decisions with long-term supply or charter commitments. With the development of spot and short-term trade, some players have designated a small number of LNG carriers for  LNG spot cargo trade.

    The increase in the use of cargo swaps to reduce shipping distance and the continuing investment in new build or converted floating re-gasification and storage units to provide alternative shipping and terminal capacity will add further a dimension to the spot cargo trade.


    LNG spot cargo-trading contracts
    Players in the LNG spot market have understood the benefits of putting in place master spot cargo trading contracts with prospective trading partners. It is preferable to negotiate a master agreement rather than spend a similar time on a one-off sale and purchase contract. A typical form of LNG spot cargo trading contract comprises two essential parts:

    • Master LNG sale and purchase agreement (“Master Agreement”) and

    • Confirmation notice/memorandum (“Confirmation Notice”).

    The Master Agreement consists of all the standard terms and conditions of LNG trading but with no firm obligation on the seller to sell or on the buyer to buy. The Confirmation Notice, a form of which is usually attached to the Master Agreement, sets out the actual purchase and sale of one or more LNG spot cargoes including details about price, quantity, LNG ship, demurrage, arrival window, laytime, loading and discharging ports, LNG heel, specifications and other requirements specific to a particular transaction. Once signed, the Confirmation Notice constitutes, together with the Master Agreement, a valid and binding contract.

    An LNG spot cargo contract could be either a one-way contract where it is clear from the Master Agreement which party is the seller and which party is the buyer; or a two-way contract where a party could be the seller in one transaction and the buyer in another.

    Either form of contract can be further divided into the following: Master Agreement for free on board (FOB) delivery, Master Agreement for delivery ex-ship (DES), Master Agreement for delivery at terminal (DAT) or Master Agreement for both FOB and DES/DAT deliveries. We may see fewer DES contracts in the coming years because DES has been removed from Incorterms 2010, which took effective on 1 January 2011.


    Trends and challenges
    So far, the LNG spot cargo trade has exhibited a healthy growth. We have seen a variety of trading models including open tenders for multiple and single cargo sales, brokered trades, cargoes sold in chains, and speculative trading positions taken up by non-traditional participants including investment banks.

    Although the LNG market is traditionally divided into two distinct markets, the Atlantic Basin and Asia Pacific markets, with minimal trade between the two, the increasing trend is that LNG cargoes will be traded between the two due to the high LNG price premium in Asia and surplus supply and subdued gas consumption in the Atlantic Basin.

    From 2009 to 2010, China was a popular destination for LNG spot cargoes. However, the recent earthquake in Japan has changed the rules of the game substantially in the region. Japan has now become the largest LNG spot cargo purchaser in the region and has driven the price of LNG spot cargoes to a level where China and other developing countries such as Thailand, Vietnam and the Philippines are under pressure to revalue their plans on expanding LNG spot cargo imports. It is not clear when the situation in Japan will improve so that other players in the region can resume their roles in the market.

    There are challenges ahead for further growth. As mentioned above, the majority of LNG carriers in service today are designed and built to provide services under a specific long-term contract. With little standardization between LNG projects around the world, sourcing or constructing an LNG carrier which is compatible with most, if not all, existing terminals can be challenging. Discussions on ship-to-shore compatibility will need to be held well in advance of any negotiation on spot cargo sales. Numerous standards have been developed over the years for the design of sample points and for LNG sampling and analysis. This can lead to variable conclusions on the quality of and properties contained in a specific cargo. Provisions on LNG sampling and testing measures in the Master Agreement should be reviewed and amended to the extent relevant according to the supply source and destination of the LNG cargoes. Storing LNG of different density and quality in the same LNG tank needs to be carefully studied and handled to avoid rollover and a sudden surge of vaporization, the pressure of which could potentially lift the storage tank pressure relief valves. Advanced technologies have made larger LNG ships, storage tanks and floating LNG units a reality, which has in turn improved the ability of LNG suppliers or buyers to cope with unexpected gas supply shortages or production disruption. Further regulatory reform in downstream markets such as Japan, Korea and China will be required.


    With the LNG spot cargo trade becoming increasingly important in the Asia Pacific region; it is essential for new players to understand the key legal, commercial and technical issues. This knowledge will help them identify the concerns and new developments in the relevant market, to analyze risks and commercial positions rationally and to make informed and prudent decisions about LNG spot cargo transactions.