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 long-term 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.
Information for this article was contributed by Anna Shiryaevskaya and Dan Murtaugh of Bloomberg News.
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