Japan wants better prices, less restrictions; Qatar says not so fast

The advent and growth of global LNG production and shipping has brought energy to markets with little or no access to natural gas for domestic use.

Countries in Asia have relied on importing LNG to fuel economic growth by providing fuel that powers manufacturing and industrial commerce. But what happens when the largest supplier and the largest customer come to blows?

Qatar and Japan have long had a relationship as the world’s largest exporter and the world’s largest importer of LNG. But lately the two have clashed, as Japanese natural gas buyers try to renegotiate long-term LNG contracts with terms much more favorable to Qatar’s largest customers.

Japan isn’t alone in the arena of LNG contract re-negotiation. The current LNG oversupply has led other Asian buyers to push for better contracts. Korea Gas Corp. (KOGAS), Japan’s JERA and China National Offshore Oil Corp. (CNOOC) have formed a group to exchange information and seek better terms in LNG sales/purchase contracts.

These three companies represent about one-third of all LNG purchases worldwide, so improving the terms for these buyers is likely to happen.

Current contract negotiations between Japanese and Qatari companies involve renewing 7.2 MTPA of gas in a contract that expires 2021.

JERA is emphasizing flexibility in contracts, which could allow JERA to become a gas trader in the future. According to Reuters, the ability to divert and cancel shipments will be a primary objective. Additional priorities are improved pricing and shortening deals from the current 25 years.

LNG supply booming

The recent boom in LNG supply will make such terms easier for Japan to achieve, as Qatar now has competition. Australian production of LNG is growing, and further export capacity is under construction. While not yet a large sized player, American LNG is beginning to ramp up. Cheniere’s Sabine Pass is approaching full capacity, its Corpus Christi facility is under construction, and other U.S.-based LNG export terminals are in the queue to supply LNG to hungry buyers in Asia and Europe. Most are in the design, approval and permitting stage with some construction underway.

LNG Titans Clash over Contract Terms

Source: Cheniere Energy

Pakistan recently renegotiated with its supplier Eni

The large amount of available supply allowed Pakistan to recently create an LNG deal with Italy’s Eni with terms similar to those JERA is seeking. According to Reuters, this contract was shorter than usual, at only 15 years, and had better pricing. Contract LNG pricing is usually a percentage of the current price of crude oil, allowing costs to rise and fall with market movements. Pakistan will pay Eni about 11.8%, significantly below the 14.2% JERA is paying Qatar.

Qatar is pushing back

LNG Titans Clash over Contract Terms

Source: Qatargas

However, Qatar is pushing back against concessions.

Two Japanese companies own a combined 15% stake in Qatargas 1, a 10 MTPA LNG project in Qatar. Japanese companies hold an additional 1.5% in the similar Qatargas 3.

According to Reuters, Qatar has said it could force these companies out of their stakes if Japan pushes too hard or switches to other LNG suppliers.

 

Nigeria’s 17-year-old plant may scoop up the contract

Along with Australian and American producers, Nigeria may be able to replace Qatar and land the JERA contract. Nigeria LNG, created in 1989, produces 22 MTPA of LNG from a plant that began operation in 2000. This facility is older than many competitors, and it has already returned its initial investment. This means Nigeria is more likely to offer more flexible terms like diversion rights and shorter contracts. According to Reuters, Nigerian LNG contracts with European firms run out in 2021-2023, and Nigeria is actively seeking replacement buyers.

LNG Titans Clash over Contract Terms

Source: Nigeria LNG


Legal Notice