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LNG producers turn to risk taking

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LNG Industry,

According to the latest report by Reuters, producers of LNG have made their lives difficult with oversupply, and face calls for flexibility and greater competition from other fuels that may force them to take more risks and start trading just like other commodity dealers.

This represents a big change for a market long dominated by large producers such as Royal Dutch Shell and BP who provide major importers with fixed volumes under multi-decade contracts linked to the price of oil.

Under the protection of these lucrative locked-in deals, producers in Australia, Qatar, Russia and elsewhere went on an investment spree that left them with a large supply overhang when demand in China and India developed more slowly than expected.

That, together with rising fuel competition from coal and renewables, contributed to a more than 70% crash in spot Asian LNG prices LNG-AS to under US$6 per mmBtu, increasing the pressure to grant more flexible contracts and better pricing options.

"The LNG market is changing rapidly, (and) the large volume long-term contracts that traditionally underpinned the development of the industry are today much more difficult to obtain," said Steve Hill, executive vice president of Shell Eastern Trading, during Gastech.

In a sign of what might be ahead, Japan's JERA and France's Total SA are set to strike its first deal soon with flexible volumes that are based on Asia LNG spot prices.

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