Top LNG buyers join forces to push for flexible contracts

South Korea’s KOGAS, Japan’s Jera, China’s CNOOC sign MOU

The world’s biggest liquefied natural gas (LNG) buyers are clubbing together to secure more flexible supply contracts in a move that further shifts power to buyers rather than producers.

Korea Gas Corp (KOGAS) said yesterday it had signed a memorandum of understanding in mid-March with Japan’s JERA and China National Offshore Oil Corp (CNOOC) to exchange information and “cooperate in the joint procurement of LNG.” Japan, China and South Korea are the world’s biggest LNG importers, accounting for about 55 per cent of global purchases, according to data from energy consultancy Wood Mackenzie.

The countries’ biggest respective buyers are joining together to extract concessions from producers that would give them supply flexibility such as having the right to resell imports to third parties, something they are not allowed to do under so-called destination restrictions.

“We have created a platform to share, discuss and solve our common issues such as traditional LNG business practices, including destination restrictions,” JERA spokesman Atsuo Sawaki said.

The unusual alliance of three buyers across three countries will pressure exporters like Qatar, Australia and Malaysia, who prefer to have clients locked into decadeslong fixed supply contracts that oblige buyers to take fixed amounts of monthly volumes irrespective of demand, with no right to re-sell unneeded supplies to other end users.

The LNG market is in the midst of huge changes as the biggest ever flood of new supplies is hitting the market, with volumes coming mainly from Australia and the United States.

New production has resulted in global installed capacity of over 300 million tonnes a year, while only around 268 million tonnes of LNG were traded in 2016, according to Thomson Reuters data in Eikon.