New LNG Contract Framework to Spur 'Oil-like' Trading Model

Introduction of GTC contracts could spur trading, cut costs; traders say existing system inefficient and tedious.

 

A new umbrella contract meant to streamline trading of liquefied natural gas (LNG), bogged down in red tape and wrangling over terms, could boost liquidity, draw in new entrants and speed up the market's transition to an oil-like model.

 

Already a mainstay of crude oil and pipeline gas trading, general terms and conditions (GTCs) provide a framework that traders can opt into by reference, scrapping the cumbersome system which currently sees LNG bought and sold through a web of bilateral master sales agreements (MSAs).

 

Ruchdi Maalouf, chair of oil and gas at law firm De Gaulle Fleurance & Associes, is the author of the first "LNG GTCs 2018", a freely available contract template which could, if adopted, cut trading costs, save dealers time and expand the pool of counter-parties by lowering barriers to entry.

 

Currently, a market player must agree up to a hundred or more MSAs between all other counter-parties before embarking on an actual trade, spending time and resources on an increasingly redundant activity as the terms and conditions in MSAs converge.

 

"Leaving aside legal technicalities, commercial terms have a 95-98 percent convergence now," Maalouf said.

 

Areas of divergence, such as liability caps when a party fails to deliver or take delivery, can be ironed out in separate confirmation notices that seal the trade, Maalouf said.

 

"Moving from MSAs to GTCs will require minimal adjustments to the trading desks, but they will improve legal risk management which is very complex at the moment with so many MSAs around," he added.

 

Traders themselves have little love for MSAs, widely disparaged as time-consuming and tedious.

 

Complaints range from the length of time needed to agree an MSA - anywhere from 15 minutes to three years - and the disproportionate effort required when contracts vary so minimally.

 

With LNG trading set to balloon as global liquefaction capacity mounts and attracts new players, reconfiguring and diversifying the market, ironing out structural inefficiencies will allow traders to capture more opportunities.

 

SLOW TO CHANGE

 

Still, adoption is not guaranteed. The LNG industry is slow to adopt new methods of doing business, as seen by the so-far tepid response to various online trading avenues via platforms and exchanges.

 

"What's missing is a standardised, neutral set of terms that can be used by the market at large, thus avoiding the tedious and time-consuming process of arranging MSAs with each individual counter-party," Kunho Lee, commercial manager at Korea Gas Corp, told Reuters.

 

Lee believes GTCs would reduce barriers to entry while facilitating trade and liquidity.

 

Peter Roberts, head of oil and gas at law firm Orrick, said swift and efficient LNG trading had been held back by MSAs, while the introduction of GTCs could serve as a tipping point for the market's development.

 

"If you have an inalienable set of terms which don't require individual negotiation, it can free up trading," Roberts said.

 

"LNG trading is increasingly moving closer to resembling oil markets rather than gas, so it makes sense for the LNG market to have an equivalent of BP's GTCs for oil introduced in 2015," he said.