LNG sellers open to lifting destination clauses: JERA executive

Some sellers of liquefied natural gas (LNG) have told Japan's JERA Co, the world's biggest importer of the fuel, that they could be open to removing destination restrictions from existing long-term contracts, a senior executive said on Friday. JERA contacted the sellers after Japan's Fair Trade Commission (FTC) ruled two weeks ago that new long-term LNG contracts signed with Japanese buyers could not have destination restrictions, or clauses that mandate where a cargo can be delivered and limit buyers from reselling excess gas.
Removing the destination clauses would radically alter the Asian LNG marketplace. Sellers have insisted on the measures for years. However, amid a glut of new supply from Australia and the United States and slackening end-user demand that has left them unable to absorb their current supply, buyers are demanding more flexibility in their contracts.
"We have already taken action to approach sellers," JERA's Senior Executive Vice President Hiroki Sato told Reuters in an interview on Friday. "We still need further discussions on details, but it looks like this would be accepted."
JERA, a joint venture between Tokyo Electric and Chubu Electric, recently began to contact its existing long-term contract sellers to explain the FTC's finding. Sato did not say which sellers were contacted. JERA imports 40 million tonnes a year of LNG, including about 35 million tonnes under long-term contracts.
Other Japanese buyers are also looking to change their contracts. Tokyo Gas, the country's biggest city-gas buyer, said on Thursday that it would seek more flexibility in its new contracts. JERA would not try to lift or mitigate the destination restrictions in all existing contracts, said Sato, because trying to revise a contract that expires in the near future would be meaningless, for example.
There is a chance that sellers may ask buyers to make concessions in return for removing destination constraints. "That includes a request to raise prices," he said. "But FTC takes a legal approach and it's not commercial. So if there were sellers to make that demand, they do not understand FTC's guidance at all."
Sato negotiated the first destination-free contract in Asia in 2000 when he worked for Chubu Electric. He has worked for more than a year to convince sellers to remove the clauses from upcoming contracts. "There is no change in our insistence of not accepting destination clauses in new contracts, but we now have an official legal backing," he said.