LNG sellers ready for more flexible contracts after years of pressure
CHIBA: Major producers of liquefied natural gas (LNG) such as Woodside and Shell are softening up on years of resistance to granting buyers more flexible term contracts, potentially opening the door to a more actively traded market for the commodity.
LNG executives, traders and dealmakers are gathering in Chiba, just outside Tokyo, for an industry conference this week. Top of the agenda has been the increased push from LNG importers wanting more flexibility over what they are allowed to do with supplies they buy under decades-long contracts.
The pressure from buyers culminated in March when the world’s biggest importers in Japan, South Korea and China agreed to form a club to focus on forcing producers to drop so-called destination clauses, which prohibit them from selling imported LNG to third parties.
In Japan this week, major LNG producers have started showing a willingness to compromise.
“There is room to negotiate flexibility in new contracts,” said Peter Coleman, chief executive of Australian energy major Woodside Petroleum, an owner and operator of several LNG export plants who is also developing more sites.
Following the announcement of the buyers’ club by Japan’s JERA, Korea Gas Corp (KOGAS) and China National Offshore Oil Corp (CNOOC), Woodside was the first major producer to signal future openness to more flexible supplies.
In Japan this week, Royal Dutch Shell’s director of integrated gas and new energies, Maarten Wetselaar, also said destination clauses in LNG contracts were “not really crucial”.
This is a significant move from Shell, the world’s biggest listed producer of LNG, because smaller suppliers are likely now to show their own willingness to offer greater flexibility for fear of losing customers. Japan, the world’s biggest importer of LNG, is also in the midst of liberalizing its power and gas markets.
That means the country’s utilities openly compete for customers, and that they need to be more flexible with their fuel imports instead of being tied to fixed long-term contracts under which they receive a set volume each month.
What makes this flexibility and liberalization an option is that the biggest ever flood of new supply is hitting the market, with large new volumes coming this year from Australia and the United States, and new future production expected from Qatar, Russia, Mozambique and potentially Canada. Although LNG demand growth is also rising, production far outpaces consumption, contributing to a more than 70 percent fall in spot LNG prices since 2014 to under $6 per million British thermal units (mmBtu).
These excess supplies are also increasingly being sold freely in the emerging Asian spot LNG market, putting further pressure on sellers.
In preparation of a more liquid market, commodity trading house Trafigura on Tuesday launched an initiative encouraging the adoption of a standard master sales and purchase agreement (MSPA) for the LNG industry, something that’s well established in other commodities such as oil.