Japan's heavyweight LNG buyers wrestle more flexible deals from suppliers

Shizuoka Gas

17/02/2017 07:00

By Aaron Sheldrick and Osamu Tsukimori 
    TOKYO, Feb 17 (Reuters) - Japan's liquefied natural gas 
(LNG) buyers are upending the traditional practices of the 
market, using their leverage as the world's biggest buyers of 
the fuel to wrestle concessions for more flexible terms. 
    Japan's electric utilities have won provisions that will 
allow them to divert contracted LNG cargoes if they restart 
their nuclear reactors, most of which have been shut since the 
2011 Fukushima disaster, three sources have told Reuters. This 
could set a precedent as more contracts start coming up for 
renewal. 
    A shrinking population and greater use of alternative fuels 
has lowered Japan's LNG demand. Because of that, utilities have 
pushed to gain allowances to resell imported cargoes and reduce 
their dependence on long-term contracts.  urn:newsml:reuters.com:*:nL3N1C236A 
 urn:newsml:reuters.com:*:nL3N1AR1E2 
    A persistent supply glut and low spot prices  LNG-AS  have 
given Japan's utilities the upper hand in their negotiations 
with sellers. About 32 million metric tonnes of annual LNG 
capacity will come online in 2017, according to a forecast from 
Reuters Supply Chain and Commodities Research, equal to about 12 
percent of 2016's global imports. 
    "With competition to place LNG heating up, price is not the 
only (contract) term under pressure. LNG suppliers will offer 
more innovative deals to secure sales," said Kerry Anne Shanks, 
head of LNG research for Asia at Wood Mackenzie. "Japan's power 
utilities are highly prized as customers." 
    Japan has traditionally used so-called take-or-pay contracts 
for LNG purchases that oblige them to pay for a fixed volume of 
imports, and they are restricted from reselling cargoes if 
demand drops. 
    Now, LNG buyers are being offered the restart provisions to 
entice them to sign up for new contracts, said an executive at 
one of Japan's gas importers. "This option was offered to us in 
a recent sales pitch." 
    These offers come as data from the International Group of 
Liquefied Natural Gas Importers (GIIGNL) shows that several 
long-term contracts between Japanese utilities, including Chubu 
Electric  9502.T , Tohoku Electric  9506.T , Shizuoka Gas 
 9543.T , and producers including Malaysia's Petronas and 
Australia's Woodside Petroleum  WPL.AX  started to expire last 
year and more will expire in 2017 and 2018. 
    Many more of the contracts will be coming up for renewal in 
the coming five years, the GIIGNL data shows. 
    Neither, the Japanese utilities nor Petronas were available 
for comment on the ongoing contractual negotiations. Woodside 
did not comment on the talks.  
    Even as Asian spot LNG prices have dropped 65 percent from 
their 2014 peak, Japan's electric utilities still want to 
restart their nuclear reactors since they are a lower-cost power 
generation source. 
     
    REACTORS REMAIN SHUT 
    All but two of Japan's reactors remain shut since the 2011 
Fukushima nuclear disaster, and many are going through a 
relicensing process that is taking longer than expected. 
 urn:newsml:reuters.com:*:nL4N1EA1EQ 
    At most, six reactors could restart this year, said Takeo 
Kikkawa, professor at the Tokyo University of Science, who 
advised the government on its most recent energy policy, adding 
the outlook was cloudy for further restarts past that. 
    The utilities are likely taking advantage of downward 
quantity tolerances (DQT), standard provisions in gas contracts 
that stipulate the minimum amount of gas that must be paid for 
whether the buyer needs it or not, said a Japanese energy 
executive with more than 20 years of working in the gas 
business.    
    Typically, DQTs are set at around 10 percent, meaning if a 
buyer signs up for 1 million tonnes of gas, it must take at 
least 90 percent of that on a guaranteed payment basis. 
    "They are pushing for much greater DQTs," the executive 
said, adding that owners of older projects would likely offer 
these options.  
    "The older projects are fully depreciated. They have been 
going for many years and they recovered all their costs so their 
costs basis is low," he said.  
    In order to maintain market share in an oversupplied market, 
LNG sellers have become willing to tweak more flexible terms. 
    "Our production costs a lot of money to develop, and what a 
buyer calls flexibility, we know as uncertainty," said a 
commercial manager at a major LNG supplier. "There's already 
more LNG in the market than is needed, and more is coming, so as 
a producer we'll have to become that much more flexible in order 
to remain competitive."   
         
 
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Japan's nuclear reactor restarts     http://tmsnrt.rs/1UTT0Tk 
Japan's LNG imports    http://tmsnrt.rs/2fG4tIt 
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 (Additional reporting by Sonali Paul in MELBOURNE and Emily 
Chow in KUALA LUMPUR; Editing by Christian Schmollinger) 
 ((aaron.sheldrick@thomsonreuters.com; 81-3-6441-1320; Reuters 
Messaging: aaron.sheldrick.thomsonreuters.com@reuters.net)) 
 
Keywords: JAPAN LNG/REACTORS