SINGAPORE (Bloomberg) –Pakistan’s main buyer of liquefied natural gas isconsidering canceling two long-term contracts as a slump in spot prices andabundant production create opportunities for cheaper supply, according topeople familiar with the situation.
State-owned Pakistan LNG Ltd. is weighing the possibility of exercisingtermination clauses in contracts it signed with Eni SpA and Gunvor GroupLtd. in 2017, according to the people, who asked not to be identifiedbecause the matter is private.
No final decision has been made and the company is seeking input from theMinistry of Energy, said the people. Canceling both deals may cost thePakistani firm nearly $300 million in penalties, according to Bloombergcalculations.
Pakistan LNG directed questions to the energy ministry, which didn’trespond to requests for comment. Gunvor declined to comment, while Enididn’t respond to requests for comment.
A glut of new LNG supply and sputtering demand growth have sent spot pricesto record lows, straining more expensive long-term supply deals based onoil prices.
The global oversupply may persist over the next few years, analystsincluding Morgan Stanley forecast, stoking speculation that buyers will bepressuring sellers for revisions to term contracts.
Pakistan isn’t alone in seeking better deals. Japan’s Osaka Gas enteredinto arbitration last year with the marketing unit of Exxon Mobil Corp.’sPNG LNG project after a dispute during a price review.
Indian gas importers have started discussions with Qatar on moving awayfrom linking LNG prices to oil and are seeking cheaper rates. In 2015,Petronet LNG reworked the pricing formula in its 25-year contract withQatar’s RasGas that resulted in lower prices.
Pakistan LNG is still open to sourcing supplies through new or revisedcontracts if the pricing terms are more favorable, according to one of thepeople.
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The South Asian nation is seen as one of the biggest growth markets for thefuel, with BloombergNEF forecasting imports could grow 80% from last year’slevel to 2023.
Under the terms of the contracts, which are posted on Pakistan LNG’swebsite, the company must give a 90-day termination notice and pay damagesequal to the value of six cargoes, which is based on average Brent pricesfor the three months preceding the month the notice is served.
That would be about $142.5 million for the Gunvor deal and $148.8 millionfor Eni, according to Bloomberg calculations based on front-month Brentfutures traded on ICE Futures Europe.
The two deals are linked to oil at a rate that prices cargoes more thandouble what’s currently available through the spot market. The Gunvorcontract, which runs for five years to June 2022, is priced at 11.62% ofBrent — or about $7.42 per million Btu according to Bloomberg calculationsusing the average of November to January.
The Eni contract, which runs for 15 years to 2032, is priced at 11.6247%for the first two years, 11.95% for the following two years, then 12.14%for the remaining 11 years, according to one of the people. Both deals arefor one cargo per month.
The Japan/Korea Marker, the spot Asian LNG benchmark published by S&PGlobal Platts, has dropped more than 50% in the past year and reached arecord low this month of $2.71 per million British thermal units.Front-month futures traded at $2.90 per per million Btu on Tuesday in NewYork. A spot cargo to neighboring India was purchased recently for as lowas $2.40 per million Btu.
