Novatek finalises more deals for Arctic LNG 2

Novatek Gas and Power Asia, the trading arm of Russia's Novatek, has finalised two separate long-term agreements to supply Chinese firms with LNG from the planned 19.8mn t/yr Arctic LNG 2 facility.

It has agreed to supply independent firm ENN with 600,000 t/yr of LNG over 11 years on a des basis to ENN's Zhoushan LNG import facility, as well as finalising a 15-year deal with Zhejiang Energy Gas for 1mn t/yr to the buyer's import terminals in China, which was preliminarily agreed in June 2021. The LNG will be sourced from the planned Novatek-led Arctic LNG 2 project, with the first 6.6mn t/yr train expected to start operations in 2023, followed by the second and third equally sized trains in 2024 and 2025, respectively. Novatek did not specify whether the two deals would be tied to specific liquefaction trains.

The two deals follow an earlier one signed between Novatek and China's Shenergy in February for 3mn t/yr of supply from Arctic LNG 2 across 15 years. Novatek has tied more of its expected Arctic LNG 2 offtake in earlier deals, signing two 1mn t/yr deals with trading firm Vitol and Spain's Repsol each, alongside a 500,000 t/yr agreement with Glencore. Novatek was also heard to be in talks with South Korea's Prism Energy for 500,000 t/yr across 12 years starting from late 2023 or early 2024, market participants said.

The firm has now covered a combined 7.1mn t/yr of its 11.9mn t/yr as part of its 60pc equity and offtake from Arctic LNG 2, or 7.6mn t/yr if the Prism Energy agreement is included. Novatek had previously said that it plans to retain around half of this 11.9mn t/yr for marketing on a spot basis, but the new agreements suggest it is willing to tie more than half of its planned supply from Arctic LNG 2 to long-term supply deals. This volume of long-term supply also suggests that at least some of the start dates of the supply deals are staggered across 2023-25, given that the volume exceeds the nameplate capacity of the first train.

But today's agreements also reflect the growing appetite of northeast Asian buyers for term LNG supply contracts, which have tallied up to at least 24 term contracts signed since the start of last year. Extreme volatility and record-high spot LNG prices over the past year have likely prompted buyers in the region to look to more rigid long-term contracts as a means of locking in more predictable and competitive rates, having previously taken advantage of the flexibility offered by spot procurement.

Near-curve oil-indexed term contract prices have stood at wide discounts to spot LNG prices for most of last year, with the oil-linked term prices for February 2022 deliveries based on three-month crude average (301) contracts at a 14.5pc and a 10pc Brent indexation standing at $11.58/mn Btu and $7.98/mn Btu yesterday, respectively. The Argus Northeast Asia (ANEA) spot delivered LNG price for the same month was $30.09/mn Btu.

Chinese firms have accounted for most of these new long-term contracts, likely spurred by growth in the country's demand for LNG imports. But South Korean, Taiwanese and Japanese companies have also stepped up to sign long-term agreements, with South Korea's Kogas and Taiwan's CPC most recently securing deals with Qatar Energy, and Japan's Jera taking a stake in the replacement feedgas supply for Australia's Darwin LNG terminal, ensuring Jera will receive 425,000 t/yr of LNG from the project after its commissioning.

By Ellie Holbrook