CEOs from Woodside Petroleum, Royal Dutch Shell and Petronas all warned against the rise in short-term contracts this week, though there appears to be an underlying belief – or maybe it’s just hope – that long-term contracts will eventually prevail to provide investment certainty for high-cost LNG projects.

The IGU’s World LNG Report, issued this week to coincide with LNG18, said the start-up of new projects last year in Australia and Indonesia contributed to the growth in non-long-term trade, that is contracts of less than five years.

The group said that the delivery of commissioning cargoes, plus the prevalence of more flexible contracts, allowed short and medium-term trade to grow in both countries by more than three million tonnes year on year.

Short-term trade totalled 71.9MMt last year, accounting for 29% of the total gross LNG trade.

LNG trade reached its biggest year ever in 2015 at 244.8MMt, up 4.7MMt from 2014 and surpassing the previous high of 241.5MMt set in 2011.

Meanwhile global liquefaction capacity reached 301.5MMtpa last year, with a further 142MMtpa under construction globally as of January this year following final investment decisions on Sabine Pass Train 5, Corpus Christi Trains 1 and 2, Freeport LNG Train 3 and Cameroon floating LNG, worth a combined 20MMtpa – all in the US.

Wood Mackenzie says 11 main LNG players will control 70 MMtpa of flexible LNG by 2021, while uncontracted supply is also increasing, allowing sellers to adapt to diverse buyer needs.

In its report publicised this week, Wood Mackenzie noted the emergence of Shell as a mega portfolio player following its acquisition of Queensland Curtis LNG operator BG Group, which the firm said had created a “huge LNG portfolio with unrivalled diversity and flexibility”

Wood Mackenzie forecasts that, by 2021, Shell’s total LNG supply will reach 54MMtpa, 35% of its next competitor, helped by optimised shipping which gives the combined entity more flexibility, reduced costs and increased profits.

“Other companies may need to follow their lead and cooperate to optimise their shipping,” Wood Mackenzie said of the combined Shell-BG entity’s new power play.

Driving force

The IGU’s report said the lack of domestic production or pipeline imports in Japan, South Korea and Taiwan had pushed those countries and others to rely on the spot market to cope with any sudden changes in demand, such as the Fukushima crisis.

In total, all non-long-term LNG trade reached 71.9MMtpa last year, a 400,000tpa rise year on year, and accounted for 29% of total gross LNG trade.

That non-long-term market has grown rapidly over the past decade since a mere 8% of volumes were traded outside of long-term contracts back in 2005.

The IGU said this growth was in part the result of the growth in LNG contracts with destination flexibility, which has facilitated diversions to higher priced markets.

The number of exporters and importers has also increased, which has amplified the complexity of the industry and introduced new permutations and linkages between buyers and sellers which operators complained about aplenty at LNG18 in Perth this week.

Only last year, 28 countries, including re-exporters, exported spot volumes to 29 end-markets – a stark contrast to the six spot exporters and eight spot importers that were around in 2000.

The decline in competitiveness of LNG relative to coal – chiefly in Europe – and North American shale gas has freed also up volumes to be re-directed elsewhere.

The IGU also cited the large disparity between prices in the Pacific and Atlantic basins from 2010 to 2014, which made arbitrage an important and lucrative monetisation strategy.

Woodside CEO Peter Coleman noted the explosion in LNG buyers over the past decade, noting that just seven countries made up 90% of LNG demand in 2005, this will expand to 25 by 2020, with Southeast Asia one of the key growth areas.

“Many of the emerging customers want choice in terms of product. They want to see portfolio flexibility and a range of supply sources,” he said.