More than $600 bn at stake as Japan probes LNG deals

Japan’s Fair Trade Commission is in preliminary stage of probing if destination clauses impede competition laws

TOKYO: Japan’s probe into whether the resale restrictions in most of its liquefied natural gas contracts violate fair trade laws may lead to the renegotiation of more than $600 billion worth of deals that run until almost the middle of the century.

The world’s biggest buyer of the fuel has agreements for at least 1.46 billion metric tonnes of supply between next year and 2040, according to Bloomberg New Energy Finance. Removing contracts that either don’t bar resale or originate in countries that traditionally don’t restrict reselling leaves about 1.03 billion tons linked to agreements that may include the limitation, worth 66.6 trillion yen ($628 billion) at last year’s average price.

The country’s Fair Trade Commission is in the preliminary stage of investigating if so-called destination clauses impede competition laws, and its finding may be announced as early as this year. Existing contracts may be renegotiated if the restrictions are found to be in violation, as happened last decade in Europe, according to BMI Research.

“Every contract, one by one, would have to be inspected to see if the JFTC’s findings apply,” said Hiroshi Hashimoto, a senior analyst with the Institute of Energy Economics, Japan. “That may turn out to be a difficult task.”

The European Commission decided in October 2004 the clauses restricted competition. Japan may need to resolve any contractual disputes after the decision via government-level negotiations, as was done in Europe, because many of the suppliers are stateowned companies, said Yoshizumi Tojo, a professor of law at Rikkyo University in Tokyo.

“Japan could stop the JFTC’s specific query into a contract in return for getting a compromise from a supplier that they remove the clause,” said Tojo.

The contracts are being reviewed as the bargaining power of LNG buyers strengthens amid a global glut and may accelerate the shift by Japanese LNG buyers from traditional importers into international sellers. The country is forecast to have a surplus 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.

“If destination clauses are found to be illegal, it will give Japanese buyers more bargaining power to renegotiate existing contracts for flexibility,” said Lu Wang, an analyst at Bloomberg Intelligence.

Other Asian LNG consumer countries may try to follow Japan, analysts including David Hewitt at Credit Suisse Group AG said in a report on Thursday.

“We would be surprised to see sellers permanently remove the restriction without the threat of a legal requirement,” according to the report. “But some sellers may choose to temporarily ease the restriction (say a three year easement) to help with the near term over-supply pressure.”

Barriers to re-shipping LNG will still exist even if destination restrictions are ended. Many sellers, such as Qatar, have their own LNG tanker fleets and have contracts structured so that the buyers only take possession of the fuel once its been delivered.

That means the buyer would have to pay for the added cost of reloading and reshipping fuel it wants to resell.