Sakhalin-2 wants to reduce the volume of spot LNG sales amid falling prices

Sakhalin Energy, which manages the Sakhalin-2 LNG project, offers Chinese buyers to purchase 12 LNG shipments per year for a period of 3-5 years, writes Platts. This is about 1 million tons of LNG, which is comparable to the volume of the offtake contract of Shell, which left the project. By thus reducing the volume of spot sales, Sakhalin-2 probably wants to insure itself in case of a further decline in gas prices.

The operator of the Sakhalin-2 LNG project, Sakhalin Energy, is offering Chinese buyers a contract for 12 LNG cargoes per year (almost 1 million tons) for a period of three to five years starting in August, industry sources told Platts. According to them, the tender will end on March 5, its price is tied to the price of Brent oil. Sakhalin Energy did not respond to Kommersant’s request.

According to Platts, buyers from Japan were not invited to the tender, while Chinese sources expect that the slope coefficient in the new contract (that is, the degree to which the price of LNG is tied to the price of oil) for new buyers will fall below 12% due to possible restrictions for the import of goods of Russian origin. At the current Brent oil price of $83 per barrel, this slope of the curve is equivalent to an LNG price of $10 per MBTU ($356 per 1 thousand cubic meters).

Sakhalin-2 is a project for the development of the Piltun-Astokhskoye and Lunskoye fields on the Sakhalin shelf, implemented since 1994 under a production sharing agreement. Initially, the shareholders of the project were Gazprom (50%), Japanese Mitsui (12.5%) and Mitsubishi (10%), as well as Shell (27.5%).

In the summer of 2022, Vladimir Putin signed a decree according to which the Russian Sakhalin Energy LLC became the operator of the project instead of Sakhalin Energy registered in Bermuda. Mitsui and Mitsubishi agreed to change jurisdiction and retain a stake in the project; Shell refused to participate in the scheme, writing off the book value of its share – $1.6 billion. NOVATEK applied for the purchase of Shell’s share.

In 2023, Sakhalin-2 exported 10.2 million tons of LNG, of which almost 6 million tons went to Japan, 2.58 million tons to China, 1.65 million tons to South Korea. Up to 90% of shipments are sold under long-term contracts.

At the same time, Shell still has an offtake contract to receive up to 1 million tons of LNG per year from Sakhalin-2 until 2028. After the actual termination of Shell’s participation in the project, Sakhalin-2 sold this volume on the spot market, taking advantage of high gas prices. But the operator is now likely to try to contract comparable volume with buyers in China on a longer-term basis.

Given the decline in spot gas prices in both Europe and Asia below $300 per 1 thousand cubic meters, Sakhalin-2 is likely no longer willing to leave these volumes on the spot market, since it will suffer losses if prices on the spot will continue to decline and fall below the level of long-term contracts. But buyers may also be reluctant to enter into new agreements due to uncertain future gas price trends.

As Bloomberg reported at the end of January, Sakhalin Energy is negotiating with buyers in North Asia to increase prices. Now, according to the publication, the contract prices of the project are at the level of 13% of the price of Brent oil, while Sakhalin-2 is asking for long-term prices for LNG with a slope of the curve of 14%.

If the contract implements an oil-linked coefficient of slightly less than 12%, this will mean that the Chinese side receives a small discount to the “fair” price, since Qatar currently contracts LNG on a long-term basis with exactly this coefficient, notes independent expert Alexander Sobko . Historically, the peg ratio was 14–15%, but has gradually begun to decline. Several years ago, after the pandemic, contracts were concluded around the world with a coefficient of 11%, Mr. Sobko recalls, but this was the lowest point.

Now, given the expected oversupply of LNG on the market, it is not surprising that the ratios may fall again. On the other hand, he adds, even with a coefficient of 11–11.5% and a Brent price of $80 per barrel, the cost of LNG will be $8.8–9.2 per MBTU, which “looks like a good deal” against the backdrop of current spot prices.

Tatiana Dyatel