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Gas Glut Upends Global Trade Flows as Buyers Find Leverage

  • Japanese may force renegotiation of $600 billion in contracts
  • India already encouraging importers to rework long-term deals

The market for liquefied natural gas is about to attract more players and more trading as new supply from the U.S. and Australia strengthens buyers’ bargaining power.

Historically, LNG has been sold on long-term contracts that guaranteed buyers supply and helped producers finance liquefaction plants at a time when less of the product was shipped. Now, a gas glut is causing LNG importing countries to support renegotiating existing deals that can run 20 years or more while suppliers offer more flexible terms to lock up customers spoiled for choice.

India already is encouraging importers to rework long-term accords to better align costs with spot market prices. Japan, the world’s largest LNG importer, may soon join them. That country’s Fair Trade Commission is in the process of probing resale restrictions in longer deals in an effort that could mean the renegotiation of more than $600 billion in contracts and boost the number of shorter-term agreements.

“There will be 40 million to 50 million tons of homeless LNG by 2020, which can go anywhere or doesn’t have any fixed customers,” said Hiroki Sato, a senior executive vice president with Jera Co., a fuel buyer that plans to increase spot and short-term LNG deals. “Homeless LNG will provide a great opportunity to improve liquidity in Asian and global markets.”

Spot Share

Global LNG trade rose 2.5 percent to a record 245.2 million tons in 2015, according to the International Group of Liquefied Natural Gas Importers. A million tons of the supercooled fuel is equivalent to about 48 billion cubic feet of natural gas, which is enough to heat about 690,000 homes for winter in the U.S. Northeast.

Twenty-eight percent of LNG traded in 2015 was on a spot or short-term basis, according to the importers’ group. That’s up from 18.9 percent in 2010, according to the group.

“The share will continue to increase,” Kazuhiko Inomata, a deputy director with Itochu Corp., Japan’s third-largest trading house, said in an interview. Spot and short-term deals may account for half of global trading in the future, Inomata said.

Asian spot prices for LNG have already slumped by about 60 percent since September 2014 amid new supplies. They fell to $5.413 per million British thermal units Monday, according to the Singapore Exchange Ltd. U.S. benchmark Henry Hub prices are down more than 35 percent over that same period and were trading at $2.601 per million Btu at 11:22 a.m. New York time.

New Supply

Additional projects like Inpex Corp.’s Ichthys project in Australia and the Cove Point export terminal on the U.S. East Coast that are expected to begin operation in 2017 may weaken prices by almost a fifth over the next two years, according to BMI Research. 

Japanese traders are getting ready for the opportunities that would arise if that nation’s Fair Trade Commission determines destination clauses in long-term contracts, which prevent resale of the fuel, violate competition laws. U.S. shale gas already has shaken up markets as American producers write contracts that allow buyers to resell LNG wherever they want.

As the oversupply intensifies next year to the point Asian buyers can’t absorb the surplus, new trading flows may emerge from Asia to Europe, according to Itochu’s Inomata.

Adding Traders

Itochu plans to increase its LNG staff in Singapore by two to three people within two years, Inomata said in the interview. Japanese rival Mitsui & Co. aims to increase the number of LNG traders at its Singapore subsidiary to as many as six over one to two years, the company said in July. The Southeast Asian city state is competing with Shanghai and Tokyo to be a regional hub for the fuel.

Itochu has leased an LNG tank at South Korea’s Gwangyang terminal that is one of only handful in Asia that can receive the fuel and then re-export it. Commodities trader Trafigura Beheer BV has similar capacity through a storage and re-loading site in Singapore.

Jera, a joint venture of Chubu Electric Power Co. and Tokyo Electric Power Company Holdings Inc., plans to resell LNG to Europe as it seeks to expand trading operations. Sumitomo Corp., the fourth-biggest Japanese trader, is said to be considering starting a LNG trading office in Europe.

Rising India

India, which aims to more than double its regasification capacity to 55 million tons within five years, wants to turn the oversupply to its favor as it seeks to make natural gas more affordable for users and increase the fuel’s use in its energy mix, Oil Minister Dharmendra Pradhan said in an interview. Natural gas currently accounts for about 7 percent of the South Asian nation’s fuel basket.

The world’s fourth largest LNG buyer was among the first countries in Asia to renegotiate a long-term deal after Petronet LNG Ltd. in December reworked a 25-year contract with Qatar’s RasGas Co., resulting in prices dropping by almost half. GAIL India Ltd. is seeking to defer a 20-year supply deal with Gazprom PJSC signed in 2012 and has said it will consider getting LNG from other sources at prices closer to spot-market rates.

“It isn’t necessarily that spot LNG is always cheaper than those supplied under long-term contracts,” said Kentaro Kimoto, an executive officer at Tokyo Gas Co., which has traditionally relied on long-term deals. “But we will need to start buying some LNG under spot or short-term contracts to minimize the divergence with market prices.”

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