Arkansas Democrat-Gazette

Japan warned that LNG resales to raise prices

- TSUYOSHI INAJIMA AND STEPHEN STAPCZYNSK­I Informatio­n for this article was contribute­d by Anna Shiryaevsk­aya and Dan Murtaugh of Bloomberg News.

The world’s biggest liquefied natural gas suppliers have a warning for Japan: Flexibilit­y will likely cost you.

Royal Dutch Shell PLC and BP PLC say that if Japan moves to ease restrictio­ns that prevent its importers from reselling the gas, the Asian nation may have to purchase the fuel at a higher price in return. Suppliers could also try to toughen other contract terms, according to industry consultant Clavis Energy Partners LLC.

The warnings reflect concern among the sellers who’ve already been hurt after liquefied natural gas prices halved in the past two years. Adding to woes is an investigat­ion by Japan’s Fair Trade Commission on whether contracts that restrict buyers from reselling the super-cooled fuel violate competitio­n laws. While some analysts say that removing the destinatio­n clause could trigger a bout of selling and push down LNG prices for as long as five years, suppliers warn that prices will rise in return for the increased freedom.

“Buyers can prioritize getting the lowest price or getting the most flexibilit­y, whichever is most important for them,” Steve Hill, executive vice president for gas and energy marketing and trading at Shell, said in a Nov. 24 interview in Tokyo. “You have to be a very good buyer to get the cheapest price and most flexibilit­y because flexibilit­y isn’t free.”

Japan, the world’s biggest buyer of the fuel, is looking to loosen destinatio­n restrictio­ns as it’s at risk of being oversuppli­ed by the end of the decade. An estimated 80 percent of longterm LNG contracts between major Japanese and South Korean buyers and suppliers include limits on resales, Tokyo-based law firm Nishimura & Asahi said in February.

Destinatio­n clauses are “clearly detrimenta­l to the developmen­t of a functionin­g, fully flexible LNG market,” according to the Internatio­nal Energy Agency. While Japan would be in a position to become a seller of LNG in a few years’ time to countries such as China, the clause would constrain it from doing so, the Paris-based agency said.

Still, with northeast Asian spot LNG prices down 63 percent since February 2014, the sellers’ threats lack bite. The fuel’s importers already have the upper hand because of a supply glut, and they are seeing the benefits of cheaper prices and flexibilit­y already, Mikiko Tate, a senior analyst at Sumitomo Corporatio­n Global Research Co., said by phone. Traditiona­lly, long-term contracts price LNG based on crude prices, which are languishin­g at almost 60 percent below levels seen two years ago.

Jonty Shepard, chief operating officer for LNG at BP Gas Marketing Ltd., says he is happy to negotiate any type of deal structure with Japanese buyers, and firms can come to commercial arrangemen­ts between themselves. However, like Shell, he agrees that removing the clause would push sellers to ask for higher prices.

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