Another Buyer in World’s No. 1 LNG User Resists Resale Curbs

  • Seeks to remove destination clauses from existing deals
  • Won’t sign new LNG agreements with destination restrictions

Osaka Gas Co. is in talks with some suppliers to remove restrictions in existing liquefied natural gas contacts that prohibit resale of the fuel amid a global oversupply.

The Osaka-based city-gas distributor won’t sign new contracts with so-called destination restrictions, Sunao Okamoto, general manager of the company’s LNG trading department said. Among Japan’s biggest buyers of the fuel, Osaka Gas plans to boost annual LNG fuel purchases to about 10 million metric tons by around 2020 and resell about 2.5 million, Okamoto said, without providing details. He didn’t elaborate on the suppliers with whom the company is in talks.

“Everyone is demanding destination-free contracts. When it becomes clear to suppliers they can’t sell LNG with such restrictions, we hope it will become the new paradigm,” Okamoto said Monday in Tokyo. “While we want all of our LNG supplies to be destination free, it has to be negotiated with sellers.”

Osaka Gas is among Asian gas consumers that are using a supply glut and price slump to gain an upper hand in negotiations with suppliers. 

Japan’s Jera

Qatar’s RasGas Co. last year agreed to revise the pricing formula in its 25-year contract with New Delhi-based Petronet LNG Ltd., resulting in costs for Indian importer to drop almost by almost half. Jera Co., a Japanese utility joint-venture that’s the country’s biggest importer of LNG, has also said it won’t sign new contracts with destination restrictions.

About 80 percent of long-term LNG contracts between major Japanese and South Korean buyers and suppliers are estimated to include destination restriction clauses, law firm Nishimura & Asahi said in a Feb. 12 presentation for a study group commissioned by Japan’s Ministry of Economy, Trade and Industry.

Japan’s Fair Trade Commission is in the preliminary stage of investigating if destination clauses impede competition laws, Bloomberg News reported in July. The probe may lead to the renegotiation of more than $600 billion worth of deals that run until almost the middle of the century.

Buyers may seek more concessions as a wave of new projects in the U.S. and Australia are set to flood the market. Annual global LNG demand is forecast to increase by 140 billion cubic meters from 2015 through 2021, which isn’t enough to absorb almost 190 billion cubic meters of new capacity slated to become operational, the International Energy Agency said in its Medium-Term Gas Market Report in June.

Part of Osaka’s supplies for resale will be sourced from the U.S. Freeport LNG development in Texas, Okamoto said. Osaka Gas has a liquefaction tolling agreement with the project for about 2.32 million metric tons a year of destination-free LNG, he said. The project is scheduled to start operations in September 2018.

“With a big amount of U.S. LNG scheduled to be supplied, it has a huge impact on how sellers think about the market,” said Okamoto. “Major suppliers that have pushed destination restrictions will be forced to change their way of thinking.”

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