Industry Trend Analysis - Relaxed Destination Clauses Could Compound Asia LNG Weakness - SEPT 2017

BMI View : The relaxation of restrictive destination clauses from existing long-term LNG contracts in Japan , as per the FTC ' s ruling , is beari sh for the regional LNG market . It pave s the way for an upsurge in cargo diversions away from Japan, adding further weakness to an already oversupplied Asian LNG market.

Japan, the world's largest buyer of LNG, is facing up to the reality of an impending gas glut at home. The abrupt loss of nuclear power in the aftermath of the 2011 Fukushima crisis drove buyers into a frenzy to secure LNG supplies to compensate. This was mostly done via restrictive, long-term contracts. However, compared to 2010-2014, when LNG demand posted average annual growth of 8.0%, consumption contracted by 3.5% over 2015-2016. This was due both to slower economic growth and rising competition from alternative power sources, notably coal, leaving Japan to figure out a way to manage its excess contracted LNG volumes.

In June 2017, the Japanese Fair Trade Commission (FTC) concluded that restrictive destination clauses contained within existing free-on-board (FOB) contracts - and to a lesser extent some contracts delivered-ex-ship (DES) - may be in violation of domestic competition laws. Although FOB contracts see ownership of cargoes transferred from sellers to buyers at the point of loading, buyers are not able to freely re-sell cargoes. The FTC's finding will likely pave the way for some of Japan's existing contracts to be revisited to include greater freedom to resell cargoes. Japan's position as a leading LNG player, precedence of a similar ousting of destination clauses in Europe and mounting pressure on sellers to protect market share amid an increasingly competitive market are all set to lend strength to domestic buyers' negotiating positions.

Contract Flexibility Key To Avert LNG Glut
Japan - Contracted LNG Volumes & Net LNG Imports, bcm
f = BMI forecast. Source: METI, BMI

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