Industry Trend Analysis - Co-operation To Pressure Contract Reform - DEC 2017

BMI View: Increasing collaboration between major LNG bu yers in the Asia-Pacific region will drive momentum for LNG contract re-negotiations , particularly with regard to contractual flexibility.

India and Japan have both agreed to enter into a Memorandum of Cooperation with regard to diversifying gas supplies and, importantly, pushing for enhanced flexibility in LNG contracting for both consumers. The agreement will open up the option for contracted LNG to be swapped between buyers - such as Australian LNG volumes destined for India swapped with Qatari gas set for Japan. Japan and India, as the first and fourth largest LNG exporters globally, subsequently possess significant leverage over the LNG market. This is particularly true with the global LNG market moving into a period of sustained surplus. As such, the bargaining position of buyers has strengthened, allowing them to better dictate the terms of their contracts.

Asia Remains Key Demand Centre
Top 10 LNG Net Exporters 2016, bcm

We see increasing scope for alliances between major buyers, shifting the balance of power in contract negotiations to consumers, and driving momentum behind flexibility and the development of a more liquid LNG market. Evidence of momentum shifting to buyers has already started to show this year, firstly with the renegotiation of an existing contract by Petronet (see ' Petronet No Bellwether For Asian LNG', September 11), and secondly, with the forthcoming contract re-negotiations in Japan, where JERA expects to remove destination-clauses from several existing contracts.

We believe the key focus for EM buyers will remain on building sufficient flexibility into contracts to adequately manage volume and price risk. Key to this is the relaxation of destination clauses and the easing of restrictions on the resale of LNG. India is likely to be more hawkish on price renegotiation considering the price-sensitivity of its consumer base. However, other LNG buyers will focus more on the flexibility of contracts. Several established markets, such as Japan and South Korea, appear over-contracted over the next five years, reducing their options to concede higher contract volumes in exchange for lower prices.