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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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The World’s Largest LNG Buyer Just Completely Reshaped The Market

LNG

Very big development in the natural gas world this week. With the world’s top purchasing nation firing a shot at producers and sellers globally.

That’s Japan — home to some of the world’s biggest buyers of liquefied natural gas (LNG), including the world’s #1 consuming firm, Jera.

And authorities here aren’t happy about the way LNG contracts have been run up until now.

Here’s the crux: historically, many LNG purchase agreements included so-called “destination clauses”. Stipulating that LNG buyers had to use the supply in a single, stated export destination.

That meant that LNG purchasers in Japan had to use their cargos in Japan. Even if it turned out they had too much supply, they couldn’t re-sell their LNG on the global market to reduce the surplus.

But the Japanese Fair Trade Commission said Wednesday that won’t fly anymore. With the trade body saying destination clauses probably violate anti-monopoly rules — and therefore will be outlawed in any future purchasing contracts for Japanese buyers.

Japanese firms are now bound by this ruling. Meaning they will have political capital to refuse LNG producers’ requests to include destination clauses in contracts going forward.

This is likely to be a contentious issue. With big suppliers like Qatar having used destination clauses to keep control over their selling power in the global LNG market.

But it’s likely Japanese purchasers will get their way — given both their clout in the industry, and the current depressed state of LNG prices due to ever-increasing competition from producers (just this week, South Korea signed another major contract for LNG supply from the U.S.).

That will mean Japanese firms will be free to re-sell any unused cargos on the global market. Meaning even more competition on the supply side, likely with a dampening effect on prices. It’s also a sign of the continued evolution of the global LNG industry and its supply chain — watch for reaction from sellers, and for new contracts coming down the pipe over the coming months.

Here’s to a sea change.

By Dave Forest

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  • Jesze on July 01 2017 said:
    This will only be a good thing for consumers and some sellers alike and hopefully it catches on. Gone are the days of tight supply from few suppliers. LNG needs a major overhaul in the way it's bought and sold. Contracts now need to be shorter and less obtuse. That's certainly the future sand it's happening already.

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