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Japan Bans Destination Clauses in New LNG Contracts

Japan’s competition regulator has ruled that new LNG contracts should not include destination or other restrictions on buyers. The Japan Fair Trade Commission (JFTC) also ruled that destination Clauses in current contracts are acceptable, provided that buyers' diversion requests are not unreasonably refused.

Competition regulators from Japan and the European Union have been swapping notes since early this decade on how LNG supply contracts could be reformed, and their colleagues from China and South Korea have also taken an interest. A review has been long-expected from JFTC.

The impact on established long-term LNG suppliers that dominate trade into Japan, such as Shell, BP, Total, ExxonMobil, Chevron, Malaysian state Petronas, Australia's Woodside and Gazprom could be significant, but at this stage it is unclear how quickly the JFTC ruling would take effect in Japan.

In its statement released June 28, the JFTC noted the popularity of US LNG imports which have “high destination flexibility” and generally lower prices, before moving on to its rulings.

"When LNG sellers conclude a new contract or revise a contract after the expiration, LNG sellers (including sellers who were users) should not provide competition-restraining clauses nor take business practices which lead to the restrictions of resale and so on. Also, as for the existing contracts before the expiration, LNG sellers, at least, should review competition-restraining business practices which lead to restrictions of resale and so on," noted the JFTC report.

JFTC further argued that for existing delivered-ex-ship contracts “the provision to require ‘seller’s consent’ to diversion…. [is] not in itself problematic under the anti-monopoly law. However, in the operation of such requirements, even if a buyer’s request meets any requirements of necessity and reasonableness from a seller, when the seller refuses its consent to diversion, such refusals are likely to be in violation of the anti-monopoly law.”

It adds that when a seller requests competition-restraining requirements for diversion, such requirements are highly likely to be in violation of the anti-monopoly law. And "if a seller prevents a user from reselling LNG by means of imposing profit share clauses which generate foreclosure effects, such clauses are, in principle, in violation of the anti-monopoly law," it says, warning that it will keep monitoring the LNG market and take strict actions against any violations of the law.

NGW contacted several major international LNG seller companies into the Japanese market for comment but had yet to receive any comment. The loss of value from the clause could however lead sellers to make other contractual changes, such as reductions in flexibility of supply.

Japan remained by far the world's largest LNG market in 2016, according to data from the Paris-based International LNG Importers Group (GIIGNL). It imported 83.34mn metric tons, representing 31.6% of the world's LNG traded volume. Its 2016 volume was 2% less than in 2015. Japan's biggest suppliers by source in 2016 were Australia 22.42mn mt, Malaysia 15.49mn mt, Qatar 12.12mn mt, Russia 7.31mn mt and Indonesia 6.7mn mt.

The European Commission as long ago as December 2002 achieved a landmark ruling when it ruled Nigeria LNG must remove destination clauses from its contracts with EU buyers. 

Mark Smedley

This post first appeared on Natural Gas Asia - Asia's Unconventional Gas And O, please read the originial post: here

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Japan Bans Destination Clauses in New LNG Contracts


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