The Adriatic liquefied natural gas (LNG) terminal is seen in Venice October 20, 2009. REUTERS/Stefano Rellandini/File Photo

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LONDON, Feb 7 (Reuters) – The threat of disruptions to gas supplies to Europe from Russia, in case the West imposes sanctions if Russia invades Ukraine, has sparked a debate about the need long-term liquefied natural gas (LNG) contracts.

The United States has in recent weeks asked Qatar and other major gas producers if they can send additional gas to Europe if Russian flows are disrupted, a source said. Read more

Some large LNG producers, such as Qatar, and energy companies that have long-term contracts say Europe should rely less on spot contracts and more on long-term contracts for its energy needs.

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It is estimated that around 70% of global LNG trade is sold via long-term contracts, but in Europe spot and short-term contracts account for around 45% to 50%.

WHAT ARE THE ADVANTAGES OF LONG-TERM CONTRACTS?

Long-term contracts can last between 10 and 25 years.

Typically, gas producers want long-term commitments for capacity expansions in capital-intensive projects.

Qatar prefers long-term contracts, usually pegged to oil, for revenue stability, said Luke Cottell, head of EMEA LNG analysis at S&P Global Platts.

Other producers, such as the United States, need long-term contracts to finance their liquefaction projects, generally selling part of the future production to traders, who have the freedom to sell it in Asia or Europe. .

“As a new wave of LNG supply comes online around the world in 2025 and 2026, there is a risk that this will drive prices much lower,” Cottell said. “While sellers now want spot exposure and buyers don’t want spot exposure, in five years the situation could change.”

WHAT IS THE EUROPEAN UNION’S POSITION?

The European Commission says long-term contracts could hamper the free flow of gas in Europe.

In reaction to the fact that single players, such as Russia, can benefit from a dominant position, EU policymakers have encouraged spot trading which can allow customers to benefit from reduced prices when supply is abundant.

They also prevent customers from being locked into using fossil fuels for years as the EU aspires to net zero emissions by 2050.

“The liberalization of the European gas market has brought a great benefit to consumers, resulting in lower than average prices compared to traditional contracts linked to oil from Russia,” said Felix Booth, head of LNG at the company. Vortexa energy intelligence.

The European Commission said late last year that long-term gas contracts should not go beyond 2049 and should not create barriers to entry for renewable and low-carbon gases. .

Producing countries, however, often say that spot trading has made price volatility worse, especially in the current climate of supply shortages following the disruption of the COVID-19 pandemic and the economic rebound.

HOW IS THE ENERGY TRANSITION AFFECTING THE MARKET?

James Huckstepp, head of gas analysis at S&P Global Platts, said the energy transition has raised fears of lower gas demand over the next five to ten years as Europe uses more green energy. , such as hydrogen.

Long-term oil-indexed contracts have been profitable over the past year for producers and traders and may continue to be so over the next two years, but the majority of these contracts have lost momentum. money over the past decade, Huckstepp said.

WHO MAKES MONEY?

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“Over the past two months, the big oil companies and utilities should have made huge margins selling US LNG at a price of around $6/MBtu to around $30/MBtu in Europe,” Guy said. Broggi, an independent LNG consultant.

There were 80 shipments a month from the United States, and each shipment made about $60 million in net profit, Broggi said.

WHAT IS THE ISSUE WITH DESTINATION CLAUSES?

Qatar and some Asian producers such as Indonesia and Malaysia applied destination clauses that limit the delivery of gas to certain markets to prevent it from being re-routed to other markets.

Such clauses are illegal in Europe and the rules of most EU countries do not prevent the shipment of LNG to other countries.

Tamir Druz, managing director of Capra Energy Group, said long-term contracts play an important role, but limit the flexibility, diversification and profit opportunities that one-off, short-term transactions allow.

The elimination of destination clauses in the EU in the 2000s and in Japan more recently has helped make long-term agreements more attractive, he said.

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Reporting by Marwa Rashad; Editing by Nina Chestney, Pratima Desai and Barbara Lewis

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