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Japan tries again for greater flexibility on LNG

Tokyo renews efforts to push reform in long-term contracts

Japan's economy ministry has once again gone public on its desire to introduce greater flexibility into the country's long-term LNG import contracts. And it is pushing improved global supply security as a motivating factor

"LNG trading rules and practices that lead to more flexibility and the convergence of the global gas market are seen as the best condition for durable competitively priced LNG supplies and for improving the resilience of the international market and its capacity to respond to emergencies," Ryo Minami, director general for natural resources at Japan's Ministry of economy, trade and industry (Meti) told a Japanese government conference in October.

Japan's fair trade commission (JFTC) ruled in June last year that a clause in free-on-board (fob) contracts which restricted buyers from reselling cargoes was anticompetitive. Since then, there have been some reports of contract renegotiation but not enough to satisfy Japanese authorities.

Meti is now pushing for more flexibility in LNG contracts and the creation of regional gas hubs to improve pricing visibility and facilitate spot trading. It also foresees Japan working more closely with the European Union to coordinate initiatives to try to improve buyer representation in the global LNG market.

Japan's fossil fuel outlook is changing, with the nation looking towards a lower-carbon future based on continued nuclear use plus renewables and imported hydrogen. Japan's demand for LNG could be negatively impacted over the next decade, with a resultant excess of contracted LNG imports bringing destination restrictions into ever sharper focus.

Leading Japanese buyers, such as Jera, Tokyo Gas, Mitsui and others, are also pushing for a rewriting of the rules around long-term LNG sale and purchase agreements (SPAs).

In March, Tokyo Gas signed a heads of agreement to buy contractual LNG from Malaysia's Petronas with flexible destination clauses, over a shorter time period and with the option for smaller volumes. Over time, the Japanese utility is also working to increase the share of short-term and spot LNG cargoes in its purchasing portfolio, while reducing volumes of long-term contracted gas.

Other Japanese utilities are rumoured to have entered into, or be considering, arbitration to encourage LNG sellers to re-write terms. Producers such as Woodside and Shell have said they are open to negotiating new contracts with more flexibility but have thus far resisted granting changes to existing deals.

According to University of Eastern Finland law professor Kim Talus, who has developed a model diversion clause for LNG SPAs which is being used as a basis for contract renegotiation by METI, "historically many LNG SPAs included destination clauses that prevented the buyer from diverting a cargo to any destination other than the original contractual destination".

"With increasing LNG trade and growing liquidity of international LNG markets such traditional clauses have in many cases been viewed as anticompetitive and have the potential to violate various national or regional antitrust laws. Today's practices relating to LNG cargos are moving towards more and more destination flexibility. The objective of this model clause is to support this development in the interest of an increase in the liquidity of global LNG trade," says Talus.

The International Energy Agency (IEA) does not appear entirely convinced by Tokyo's stress on global supply security, seeing a disconnect between what 'flexibility' means for different LNG buyers. It is also worried about the potential mis-match between buyers' desires and the financing requirements of sellers.

The priorities in terms of flexibility differ for long-term traditional buyers, who seek the removal of destination clauses, and new emerging buyers, whose priority is more focused on procuring short-term supply, usually for prompt execution, the IEA's annual global gas security review noted recently.

It also flagged the potential paradox that market flexibility depends on there being sufficient investment in production and infrastructure capacity — which could be jeopardised if suppliers are unable to underwrite project finance with the long-term, fixed price contracts of which buyers are increasingly wary.

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