Japan to Seek LNG Contract Details Amid Resale Probe

Updated on
  • Fair Trade Commission requests details on destination clauses
  • Country is world’s largest buyer of the super-cooled fuel

Japan’s Fair Trade Commission is seeking contract details from the country’s LNG buyers as part of its investigation into whether restrictions on the resale of the fuel impede free competition, according to people familiar with the matter.

The commission last month requested details on so-called destination clauses embedded in their purchase contracts, which bar the resale of the cargoes to other buyers, said the people, who asked not to be identified because the information isn’t public. Details sought include whether those clauses can be changed, terms of delivery and the number of cargoes received since fiscal year 2013, one of the people said.

Japan’s Fair Trade Commission was in the early stages of investigating whether contracts that restrict buyers from reselling the super-cooled fuel violate laws, Bloomberg News reported in July. A removal of such clauses could trigger “a flurry” of unrestricted outbound cargoes from Japan that may push down LNG prices for as long as five years, BMI Research said at the time.

“Removal of destination clauses will improve the flexibility of LNG supply,” Kerry Anne Shanks, an analyst at Wood Mackenzie Ltd. in Singapore, said in an e-mail. “It could support Japan’s ambitions to develop an LNG hub. Furthermore it will help Japanese players who are looking to expand internationally, as it means they can either divert or re-export LNG to new markets.”

Japan’s Fair Trade Commission declined to comment.

About 80 percent of long-term liquefied natural gas supply 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. South Korea, the second-largest LNG importer, may follow if Japan progresses with the investigation, according to Shanks.

Demand Uncertainty

The European Commission decided in October 2004 that such clauses restrict competition.

The contracts are under review as Japanese utilities struggle with possible demand declines at home amid uncertainty over nuclear reactor restarts after the country’s fleet was shut for safety checks following the 2011 Fukushima disaster. Just two of the nation’s 42 operable reactors are currently producing power commercially.

Japan’s Jera Co., one of the world’s largest buyers of LNG, said in July it was planning a second deal to resell LNG to European customers as it seeks overseas outlets to offset a possible domestic surplus. The country is forecast to have an excess of 12.2 billion cubic meters of LNG in 2017, 8.1 billion in 2018 and 8.6 billion in 2019, according to a February report from BMI Research.

— With assistance by Aaron Clark

(Updates with possible LNG surplus in ninth paragraph.)
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