By March 23, 2017 Read More →

World’s biggest LNG buyers create alliance to secure flexible contracts

LNG buyers

LNG buyers are currently locked into long-term contracts with conditions favorable to sellers, but as LNG production grows, importers are looking to gain power in negotiations. Shell photo.

LNG buyers hope to shift power from suppliers to importers

The world’s largest LNG buyers, all located in Asia, are teaming up to secure more flexible supply contracts in a move that will shift power to importers from producers as the global liquified natural gas supply grows.

Reuters reported on Thursday, Korea Gas Corp, or KOGAS, along with Japan’s JERA and China National Offshore Oil Corp, or CNOOC, have signed a memorandum of understanding to exchange information and “cooperate in the joint procurement of LNG.”

The three companies purchase about one-third of global LNG production, giving them strength to challenge sellers’ contract terms.

An alliance like this is a new development in commodity markets where it is usually producers, such as OPEC, who wield power and can enforce production quotas to manage prices.

Prior to 2014, high LNG prices left Asian importers desperate to contain losses.  During this time, the first talks about joint purchases involving India, Japan, South Korea, China and Taiwan began.

Since then, several agreements involving LNG buyers from different countries have occurred, but none to this magnitude.

Under the terms of the proposed deal, buyers will have flexibility to re-sell imports to third parties, something that is now allowed under the current so-called destination restrictions.


“We have created a platform to share, discuss and solve our common issues such as traditional LNG business practices, including destination restrictions,” JERA spokesman Atsuo Sawaki told Reuters.

The three-buyer alliance will put pressure on LNG exporters like Qatar, Australia and Malaysia who prefer to lock their clients into fixed supply contracts that run for decades and force buyers to take fixed amounts of monthly volumes, no matter what their demand is.  There are no re-sell provisions in these deals.

While JERA, KOGAS and CNOOC are all under contract and dealing with excess supply currently, the three are looking to rework existing deals.

KOGAS usually buys LNG for winter, while CNOOC for summer and JERA for both seasons.  A flexible deal would allow the companies to swap cargoes, according to industry sources.

In an interview with Reuters, Kerry Anne Shanks, head of LNG research for Asia/Pacific at Wood Mackenzie said “Flexibility is becoming critical for LNG buyers … as the rise of solar capacity is going to make consumption of LNG more seasonal.”

However, LNG buyers who are emboldened by oversupplied markets may regret their actions when the cycle turns, according to a senior Qatar Petroleum official.


“Right now the market is over-supplied but if we went into a period of a tighter market, how would these buyers organizations hold up? That is an important question,” the official told Reuters in an interview.

“If there is a market crunch and gas tightens it could recreate incentives for buyers to lock in long-term contracts.”

Currently, the LNG market is undergoing massive changes as a flood of new supply from Australia and the United States hits the market.  Asian LNG spot prices are down over 70 per cent from their peaks in 2014.

Thomson Reuters data shows new production has resulted in global installed LNG capacity of over 300 million tonnes/year, while only 268 million tonnes of LNG were traded in 2016.



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