Japanese moves blunt LNG expectations

Asian buyers know full well that, after years of getting beaten up on LNG price, they are now in the driving seat.

I closed my last column on the potential for a northwestern liquefied natural gas (LNG) industry by pointing out that even if the price of oil shoots up, that won’t change the fact that there will still be a huge glut of LNG.

And Asian buyers know full well that, after years of getting beaten up on price because demand outstripped supply, they are now in the driving seat.

Here are a couple of examples from Japan of how they are flexing their muscles in this buyers market.

Many traditional long-term LNG contracts stipulated that the producer/seller would deliver X amount of LNG each year from a specific liquefaction plant it owned to a specific regasification plant of the buyer.

Many of them also had a take-or-pay provision so if the buyer found it had overestimated what it would need and did not take up its full amount, it had to pay a penalty. They also prohibited the buyer, realizing it was over committed, from finding a secondary buyer for the excess and telling the seller to send the cargo to that different destination.

Japan is now taking aim at that restriction through its Fair Trade Commission which is investigating whether that last clause is contrary to that country’s competition laws. And I don’t think there is much doubt as to what its finding will be.

The advantage to the over committed buyer is obvious: the amount it can get from the secondary buyer may be less than it is contractually required to pay the seller, but the shortfall will likely be less than the amount it would have to pay under the penalty clause. The downside for the seller is that it could find one of its customers on-selling the seller’s product to markets it is itself trying to sell into.

However, there is little doubt that the sellers are going to have to give ground because in a buyers market they have little choice but to arrive at a reasonable compromise. Incidentally, the restrictive destination clause was outlawed 12 years ago by the European Commission.

The other item out of Japan relates to the traditional LNG contract which was long-term with the price linked to that of oil.

Tokyo Electric Power and Chubu Electric Power recently formed a joint venture called JERA which is now the largest LNG importer not just in Japan but in the world, bringing in 40 million tonnes per annum (mtpa), 34.5 mtpa of which is under long–term contracts of 10 years or longer.

But JERA president Yuji Kakimi says by 2030 the company will have reduced its long-term commitments to about 20 mtpa, a drop of just over 40 per cent. Consequently JERA has no plans to sign new long-term contracts for the foreseeable future.

And where the world’s largest importer leads, many others are sure to follow.

That is not good news for Kitimat LNG and LNG Canada, both of which depend on nailing down long-term contracts.

Even more troubling is the logic behind JERA settling on the 20 mtpa number – that it will only need that amount locked in because of the increased power available domestically from the reopening of nuclear plants and from renewables like solar power.

I am still confident that one day the stars will align and there will be a thriving LNG industry in the Northwest.

The only question is will I live long enough to see it.

FOOT NOTE: With Kitimat LNG and LNG Canada both on the back burner, the only LNG project in this region still theoretically breathing is Petronas’ Pacific NorthWest LNG in Prince Rupert which is awaiting the federal cabinet’s yay or nay on the project this fall.

I predict that it will approve the project, subject to the obligatory lengthy list of conditions, but do not expect that to translate to an immediate final investment decision. “Sources” inside the Malaysian state-owned company have already said the first thing that will happen in the event of a positive verdict from the feds is a full review of the project by the company.

And for the reasons above and several more, it is a foregone conclusion it too will head to the back burner.

Retired Kitimat Northern Sentinel editor Malcolm Baxter now calls Terrace home.

baxyard@gmail.com

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