01-09-2016

Japan’s Jera raises pressure on LNG exporters to drop destination clauses

LNG

Japan’s Jera, the world’s biggest importer of liquefied natural gas (LNG), is raising the pressure on exporters to allow it to resell gas it has to take under long-term supply contracts. Most LNG contracts forbid importers from reselling their cargoes under so-called destination clauses. But, soaring supply, especially from Australia and North America, and slumping demand has importers unable to absorb their contracted volumes. As a result, they are seeking more flexibility.

Jera, a joint venture between Tokyo Electric Power and Chubu Electric Power, took over its parent companies’ existing fuel contracts last month. With an annual offtake of 40 million tonnes, it’s now the world’s biggest LNG buyer, topping Korea Gas Corp. Jera’s Chief Fuel Transactions Officer and Senior Executive Vice President, Hiroki Sato, told Reuters that he did not want to have any further discussions involving destination clauses with producers. “I’m aiming to have destination clauses out of the discussions,” he said.

Sato is keen to see Japan’s big LNG importers join together to put pressure on exporters and extract more beneficial terms. To strengthen Japan’s negotiating position further, he would welcome if Tokyo Gas and Kansai Electric merged LNG procurement like Jera and hoped that LNG purchases could be consolidated.

“Grouping Japanese buyers to two or three firms roughly the size of KOGAS would be best to lower energy cost and improve Japan’s trade balance,” he said. Jera has repeatedly voiced its opposition to destination clauses, but now hopes get more government support.

The European Commission in 2004 ruled that destination clauses infringe competition. Now, Japan’s Fair Trade Commission (JFTC) is exchanging information with the government on destination clauses. “If JFTC judged that the clause would hamper fair market principles, then that would become a big weapon,” Sato said.

LNG exporters that use destination clauses are also coming under pressure from the United States, where Cheniere Energy started exporting this year and sent its first cargo to Asia last month through the newly expanded Panama Canal. As opposed to the contracts from most new Australian LNG projects, US LNG is priced off domestic spot markets and does not include destination restrictions. For Jera, less than 10 percent of its contracted supplies are completely destination free. The vast majority come with conditions such as profit-sharing of re-sold cargoes or an obligation to seek pre-approval from sellers.

To get more LNG without destination clauses, Jera plans to take more stakes in US LNG projects, and is in talks with European utilities to sign flexible supply contracts. This would increase the company’s spot volumes to over 20 percent in 2020, up from around 11 percent now, Sato said. Sato expects the LNG oversupply to continue as production outpaces supply and that the annual overhang would be 50 million tonnes by 2020. This compares to output of around 70 million tonnes from the biggest exporter, Qatar. The supply overhang has helped pull down Asian spot LNG prices by 70 percent since their 2014 peaks to $5.80 per million British thermal units.

Source: Reuters

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