Japan May Renegotiate LNG Contract Terms

Japan's Fair Trade Commission has opened an investigation into whether long-term LNG purchase contracts containing clauses prohibiting resale are anti-competitive – exposing over a billion tons of LNG sales, worth $600 billion, to the possibility of renegotiation. 

“Every contract, one by one, would have to be inspected to see if the JFTC’s findings apply,” said Hiroshi Hashimoto, senior analyst with the Institute of Energy Economics, speaking to Bloomberg. “That may turn out to be a difficult task.” As many of the sellers are government entities, the renegotiation may have to occur at the level of diplomacy. 

The EU has already determined that such clauses restrict competition. 

Japan will have LNG surpluses in coming years, and the ability to resell would help address the overcapacity – if the market conditions support resale – and the chance to renegotiate contracts could allow discussion of other terms as well. Buyers are now at an advantage in the Asia-Pacific market due to a growing oversupply of LNG.

Spot contract price averages (delivered to Japan) have been below $5 per mmBTU since April – less than a third of levels seen in October 2014. Most contracts are linked to the price of crude, and as oil has fallen dramatically the cost of LNG from Australian plants and other suppliers has fallen sharply.

The investigation also comes as Japan seeks to develop a regional price benchmark for the region. The Tokyo Commodity Exchange has set up a Japan OTC Exchange for LNG in an attempt to provide pricing transparency for trading groups like JERA, the world's largest buyer. So far, though, the exchange has handled only one small contract in a nearly two years of operation. Liquidity is limited, but that may change next year, traders say, when American LNG producers are expected to begin selling cargoes on the spot market.