The Japan Fair Trade Commission is examining whether destination clauses, long-time features of LNG sales contracts that restrict buyers from selling cargoes to third parties, are anti-competitive.
TOKYO: A new Japanese regulatory probe into sales restrictions for liquefied natural gas (LNG) contracts will be at the forefront of discussion as the industry's biggest buyers and sellers gather in Tokyo this week.
Representatives from major LNG producers Qatar, Australia and Malaysia will meet with buyers from companies including Japan's Jera Co, the world's biggest buyer of the fuel, and Taiwan's CPC Corp to find ways to address a market where demand is only about 76 percent of supply, Thomson Reuters Eikon data shows. The overhang is leading the industry to question everything from how the fuel is priced to how it is sold.
Adding to the disruption, the Japan Fair Trade Commission is examining whether destination clauses, long-time features of LNG sales contracts that restrict buyers from selling cargoes to third parties, are anti-competitive. The investigation could force the renegotiation of billions of dollars of existing LNG contracts.
Buyers in Japan, the world's biggest LNG importer, have long complained about destination clauses and will voice their displeasure again at the LNG producers and consumers conference on Thursday.
"It is desirable to have no destination restrictions," Takehiro Honjo, president of Osaka Gas, Japan's second biggest city gas company, said on Friday. He added that about 20 percent of its current LNG contracts do not have the clauses.
Japan's buyers are now overcommitted to their contractual LNG cargoes as demand is dropping. They want more leeway to resell the spare cargoes but are prevented by the clauses.
"Japan appears to be following Europe's example, (which) led to these clauses being reviewed in a number of gas and LNG supply arrangements and supported improved flexibility," said Kerry Anne Shanks, vice president, Asia gas and LNG research, at Wood Mackenzie.
She pointed to the example of Spain, where re-exports of cargoes totalled nearly 4 million tonnes in 2014. A cargo is typically about 110,000 tonnes.
Producers have rebuffed the objections. But, they are having to reconsider that position because of increasing U.S. LNG exports, which do not carry the destination restrictions.
Japan, Europe, South Korea, China and India, which together account for about 80 percent of the world's total LNG imports, have jointly called for relaxing or abolishing the destination clause, Japan's trade ministry said.
Major sellers could be convinced to relax or remove the restrictions if buyers would make other concessions, said a source familiar with their thinking.
"Cancelling the clause will have to result in some give elsewhere," said the source.
But with prices down by nearly two-thirds from their 2014 high
"It's a buyers market now. We are asking them (sellers) not to include destination restrictions as much as possible and we have made some progress on reaching an understanding," Tokyo Gas Executive Officer Kentaro Kimoto, who is in charge of the company gas resources department told reporters on Monday. - Reuters
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