The Japan Fair Trade Commission’s (JFTC) decision last week to outlaw destination clauses within LNG purchase contracts is expected to usher in major changes to the LNG market, which is sufficiently supplied but continues to see new volumes come on stream.
The JFTC’s move is a likely indication of changes that will come to LNG trading in the years ahead, as greater supply becomes available and the relationship between gas and oil prices adjusts to new global circumstances.
In an extensive examination of LNG trading for Japanese companies, the JFTC found that certain aspects of some of the contracts were in violation of antimonopoly laws. The commission ruled that once the buyer had taken possession of the LNG, as it would in a freight-on-board (FOB) purchase, the seller no longer had control over where the cargo was delivered or whether it could be resold. Also, clauses that would require the buyer to share any profit it made from the resale of a cargo with the original seller would no longer be allowed.
Eye on the future
Japan is the world’s largest LNG importer, followed by South Korea and China. With more LNG entering the market, the JFTC began a study of trading last year for the purpose of liberalising a market that has been dominated by a few suppliers, particularly Qatar.
But Qatar’s market dominance is predicted to slip in the years ahead and Japan is keen to develop a more fluid environment in which restrictions on the movement of the fuel are eliminated. The ruling is expected to enable Japanese buyers to negotiate better contracts that have until now limited them to delivering LNG to a particular destination. Most of Japan’s contracts, many of which are due to expire in 2021, have also been long-term.
Australia, Papua New Guinea (PNG), the US, as well as East Africa, Canada and Russia all figure as prominent future suppliers of LNG to Far East markets.
Japan’s move could encourage the creation of trading hub for its region of the Pacific Basin and it will also likely influence other major LNG markets such as South Korea, China and India to re-examine the terms of agreements with their suppliers.
Japan accounts for around 30% of the LNG traded on the international market, with imports amounting to 85 million tonnes in the year to March 31 and being valued at roughly US$30 billion. Its future demand for LNG remains strong, but the country intends to reintroduce nuclear power into its energy mix as well as alternative sources.
Global LNG trade in 2016 amounted to 258 million tonnes, with Qatar supplying about 80 million tonnes of that.
The JFTC’s decision is similar to one made in 2005 when the European Union eliminated contractual clauses that had forbidden Russian natural gas delivered to Germany from being resold to other European states.
Japan’s commission has been considering an evaluation of the LNG trading system for some time and last year requested Japanese firms to provide it with contract details.
The JFTC said its motives in conducting the study were based on a decision taken by the Japanese government to “promote the abolishment of destinations restrictions” following expressions of concerns about the easing of the supply-demand balance with the restart of nuclear power plants (NPPs) and the anticipated future diversification of the energy mix.
Also of concern were the uncertain prospects in forecasting domestic demand in Japan, the global increase in demand and the global growth in supply considering the development of unconventional gas sources. The commission said that owing to these circumstances, Japanese users were predicting excess LNG supply and were also concerned that destination restrictions would prevent them from reselling excess LNG inside or outside Japan in the future.
As a future course of action, the JFTC recommended that LNG sellers conclude a new contract or revise a contract after its expiration that would not include “competition-restraining clauses nor take business practices that lead to restrictions of resale and so on”. It said sellers should also review existing contracts that contain such clauses.
It added that when active competition in fixed-term and spot market contracts reduced procurement costs, the buyers “are expected to properly reflect such reduction on electricity rates or city gas rates and to contribute to the benefit of Japanese consumers”.
The JFTC said it would continue to monitor the LNG market and take strict action against any violation of the Antimonopoly Act under which its decisions were based.