25 MTPA now available for resale
The Japan Fair Trade Commission has outlawed certain restrictions on LNG contracts, in what could be a major win for the LNG buyer.
The JFTC undertook a large study of the LNG trade, concluding by ruling that contracts should not have restrictions on resale once the buyers have taken title. These restrictions, often called “destination restrictions,” mean that buyers of LNG are not able to re-sell the gas to third parties. Such restrictions have made it impossible for LNG buyers to sell excess supplies, which they buy in fixed volumes as part of their long-term contracts.
LNG buyers are trying to get out of destination clauses
The three largest LNG buyers, Korea Gas Corp. (KOGAS), Japan’s JERA and China National Offshore Oil Corp. (CNOOC), took aim at such restrictions when they formed an “LNG Buyers’ Club” in March.
Their efforts appear to be paying off, as competition between suppliers is changing contract terms. In May, Petronas began exploring shorter-term contracts and smaller cargo sizes to make contracts more appealing.
At the end of May, Qatar and Japan clashed over contract terms. Japanese companies have been attempting to secure better pricing and contract terms, which the world’s largest LNG exporter has resisted. According to Reuters, the government of Qatar was threatening to force Japanese companies out of stakes in Qatari natural gas projects if JERA pushed too hard or switched to other LNG suppliers.
Long term effect on LNG contract negotiating
The ruling by the JFTC may be a major factor in future negotiations with suppliers. JERA is already seeking the ability to resell its purchased gas, and now it seems to have Japanese law on its side. If South Korea and China follow suit by restricting destination clauses, it may spell the end for such restrictions.
Not all destination restrictions banned
However, the JFTC ruling does not ban destination clauses entirely. Restrictions in “Ex-ship” contracts, where the seller owns the fuel in transit, were acceptable, according to the JFTC. Only “free-on-board” deals, where the buyer takes ownership of the LNG the moment it is loaded onto the tanker, require no destination clauses.
According to Bloomberg, 40% of all LNG imported by Japan is under “free-on-board” contracts. The 25 MTPA of LNG supplied through these contracts will be available for resale by JERA. This seems to be one of the ultimate goals of the buyers’ club, as a large volume of LNG available for resale would support a spot market. KOGAS typically needs gas in the winter, while CNOOC buys gas for the summer and JERA buys gas throughout the year. If the companies could trade amongst themselves, they would be able to respond to the variations in demand timing.
