LNG contracts transformation: increasing the resource''s competitive power

The article represents a research on LNG contracts evolution: starting with reasons behind persistent dominance of long-term contracts, followed by the analysis of their current transformation, possible future development and the role of such processes in forming global gas market and turning LNG into traded commodity - the two key powers of enhancing competitiveness. High level of specialization and the cost of LNG infrastructure determined the key features of contract relations during the first years of the LNG sector more than 50 years ago. With few buyers and sellers, back in that day trade based on short-term basis, would have created substantial risks for both parties. Thus, for the purposes of mitigating those risks and market uncertainty and facilitating efficient trade long-term contracts were the most suitable option. But as the sector developed such contracts lost their ability to reflect changes in market fundamental adequately and sufficiently restricted LNG's ability to compete with other energy sources. Different external shocks, with which the global energy markets recent turbulent environment bustles, increase and diversification of demand and supply, and possible oversupply, disadvantages of existing pricing system, technological innovation and even excessive growth of LNG fleet contributed in active development of short-term and spot trade and consequently the market globalization process. Long-term contracts will hardly become extinct but will definitely undergo substantial changes. Historical antecedents from other energy markets (oil in 1970-1980, US gas in the late 1990s) prove the conclusions of the long-term outcomes of the current transformation and their role in forming a liquid market and increasing LNG's competitiveness. There is still a long way ahead for the gas market to become global and the LNG sector, the main driving force of the globalization will undergo a cobweb process of finding the most optimal and efficient form of contractual relations. But these are the transformations critically boosting LNG's power to compete within the energy sector.

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