SEOUL/TOKYO/MILAN (Reuters) - The world’s biggest liquefied natural gas (LNG) buyers, all in Asia, are clubbing together to secure more flexible supply contracts in a move which shifts power to importers from producers as oversupply grows.
Korea Gas Corp (KOGAS) said on Thursday it had signed a memorandum of understanding in mid-March with Japan’s JERA and China National Offshore Oil Corp (CNOOC) to exchange information and “cooperate in the joint procurement of LNG.”
Together, the three companies purchase a third of global LNG production, giving them a strong hand to challenge restrictive contract terms that have squeezed buyers’ finances.
Influential buyers’ clubs are largely unheard of in commodity markets where it is the producers, such as the Organisation of Petroleum Exporting Countries (OPEC), who wield power, enforcing production quotas to manage prices.
A painful period of high LNG prices before 2014 left Asian importers scrambling to contain losses and led to the first talks between India, Japan, South Korea, China and Taiwan about joint purchases.
Several joint LNG-buying deals have been set up since then but none approach the scale of the latest agreement, which is the first involving the game’s biggest players.
Under Thursday’s agreement, the buyers aim to extract concessions from producers that would give them supply flexibility, such as having the right to re-sell imports to third parties, something they are not allowed to do currently under 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,” said JERA spokesman Atsuo Sawaki.
The alliance of three big buyers across three countries will put pressure on exporters such as Qatar, Australia and Malaysia. They prefer to have clients locked into fixed supply contracts which run for decades and make buyers take fixed amounts of monthly volumes irrespective of demand, with no right to re-sell surplus supplies to other end-users.
The agreement has been helped by the fact the power wielded by OPEC is unparalleled in the commodities world. Attempts to create an OPEC-style body through the Gas Exporting Countries Forum has failed to gain traction because gas and LNG markets are more fragmented than oil, while similar moves in coffee, railroads, rubber and tin have all collapsed over the decades.
The LNG market is undergoing huge changes as the biggest ever flood of new supply is hitting the market, with volumes coming mainly from Australia and the United States.
JERA, KOGAS and CNOOC will all struggle with having excess supplies in the next few years, sources at three major LNG producers told Reuters, curbing the consortium’s ability to strike any new deals this decade.
Reworking existing deals, however, is feasible and may hit the world’s biggest producer Qatar the hardest as many of its mid-term supply deals with Japan start to expire from around 2023, industry sources said.
A senior Qatar Petroleum official hinted that buyers - emboldened by temporarily oversupplied markets to demand better terms - may come to regret their actions when the cycle turns.
“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 said.
“If there is a market crunch and gas tightens it could recreate incentives for buyers to lock in long-term contracts.”
More practically, the deal complements the buying habits of each company - KOGAS largely buys for winter, CNOOC for summer and JERA across both seasons - offering opportunities for swapping cargoes, industry sources said.
“Flexibility is becoming critical for LNG buyers ... as the rise of solar capacity is going to make consumption of LNG more seasonal,” said Kerry Anne Shanks, head of LNG research for Asia/Pacific at Wood Mackenzie.
New production has resulted in global installed LNG capacity of over 300 million tonnes a year, while only around 268 million tonnes of LNG were traded in 2016, according to Thomson Reuters data.
That has helped pull down Asian spot LNG prices by more than 70 percent from their 2014 peaks to $5.65 per million British thermal units (mmBtu).
It has also given importers more suppliers to choose from, putting pressure on major producers like Royal Dutch Shell, Chevron, ExxonMobil and Woodside Petroleum to grant more flexible contract terms.
Companies forming cartels are difficult to challenge at the World Trade Organization, which does not have rules about anti-competitive behavior and only governs trade relations between member countries. But WTO rules do oblige state-run firms to trade on commercial and non-discriminatory terms.
Thomas Cottier, a law professor and senior research fellow at the World Trade Institute at the University of Bern, said the LNG alliance may or may not comply with the WTO rules.
“To the extent that governments are directly or indirectly involved, it may violate rules on state trading or the prohibition to encourage voluntary export restraints. However, conduct of private companies is subject to domestic anti-trust law and is not part of WTO law,” he told Reuters by email.
Even if an LNG supplier such as Qatar, Russia or Australia launched a dispute at the WTO, several other major gas producers such as Iran and Turkmenistan are not members of the WTO and therefore have no right to have their complaints heard there.
For a graphic on top Asian LNG buyers from alliance, click here
Additional reporting by Mark Tay in SINGAPORE, Sonali Paul in MELBOURNE, Tom Miles in GENEVA, Tom Finn in DOHA; Editing by Nina Chestney and Pravin Char