Biggest LNG Sellers Warn Top Buyer Over Price of Its Freedom

Updated on
  • Suppliers say Japan may pay more if destination clauses eased
  • Osaka Gas, a major buyer, is worried LNG costs could rise

The world’s biggest liquefied natural gas suppliers have a warning for Japan: flexibility will likely cost you.

Royal Dutch Shell Plc and BP Plc say that if Japan moves to ease restrictions that prevent its importers from reselling the gas, the Asian nation may have to purchase the fuel at a higher price in return. Suppliers could also try to toughen other contract terms, according to industry consultant Clavis Energy Partners LLC.

The warnings reflect concern among the sellers who’ve already been hurt after LNG prices halved in the last two years. Adding to woes is an investigation by Japan’s Fair Trade Commission on whether contracts that restrict buyers from reselling the super-cooled fuel violate competition laws. While some analysts say that removing the destination clause could trigger a bout of selling and push down LNG for as long as five years, suppliers warn that prices will rise in return for the increased freedom.

“Buyers can prioritize getting the lowest price or getting the most flexibility, whichever is most important for them,” Steve Hill, executive vice president for gas and energy marketing and trading at Shell, said in a Nov. 24 interview in Tokyo. “You have to be a very good buyer to get the cheapest price and most flexibility because flexibility isn’t free.”

Japan, the world’s biggest buyer of the fuel, is looking to loosen destination restrictions as it’s at risk of being oversupplied by the end of the decade. An estimated 80 percent of long-term LNG contracts between major Japanese and South Korean buyers and suppliers include limits on resales, Tokyo-based law firm Nishimura & Asahi said in February.

Destination clauses are “clearly detrimental to the development of a functioning, fully flexible LNG market,” according to the International Energy Agency. While Japan would be in a position to become a seller of LNG in a few years time to countries such as China, the clause would constrain it from doing so, the Paris-based IEA said.

Lacking Bite

Still, with northeast Asian spot LNG prices down 63 percent since February 2014, the sellers’ threats lack bite. The fuel’s importers already have the upper hand because of a supply glut, and are seeing the benefits of cheaper prices and flexibility already, Mikiko Tate, a senior analyst at Sumitomo Corporation Global Research Co., said by phone. Traditionally, long-term contracts price LNG based on crude prices, which are languishing at almost 60 percent below levels seen two years ago.

Spot LNG in Northeast Asia declined by 30 cents from a week earlier to $7.25 per million British thermal units on Nov. 21. Brent slipped 1.9 percent to $47.32 per barrel by 12:12 p.m. London time on Tuesday.

But prices may not be the sole ammunition in the sellers’ arsenal. Suppliers could also push for tougher contract terms such as take-or-pay clauses, where the buyer either takes the LNG from the supplier or pays a penalty, says Junzo Tamamizu, managing partner at Clavis Energy.

Flexibility’s Worth?

Jonty Shepard, chief operating officer for LNG at BP Gas Marketing Ltd., says he is happy to negotiate any type of deal structure with Japanese buyers, and firms can come to commercial arrangements between themselves. However, like Shell, he agrees that removing the clause would push sellers to ask for higher prices.

“Which flexibilities are worth it to them?” said BP’s Shepard. “They may pay for flexibilities they don’t need.”

Even one of the strongest advocates for change is worried costs could rise. Sellers often offer a cheap price when they know their cargoes will be delivered to a fixed terminal, Masayuki Inoue, a senior general manager in the corporate strategy department at Osaka Gas, one of Japan’s major LNG buyers, said on Nov. 18.

“I’m personally in favor of destination-free LNG and have negotiated hard for it,” Inoue said in Tokyo. “But it’s not that everything will be OK if the destination is free. It could actually raise costs.”

— With assistance by Anna Shiryaevskaya, and Dan Murtaugh

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE