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Analysis: Asian LNG buyers accelerate push for destination flexibility in gas contracts

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Analysis: Asian LNG buyers accelerate push for destination flexibility in gas contracts


ASEAN circulates LNG contract without destination restrictions

Japan publishes model clause for LNG contracts

ASEAN to work with North Asia to boost flexible LNG

  • Author
  • Eric Yep
  • Editor
  • Wendy Wells
  • Commodity
  • Natural Gas
  • Topic
  • LNG Commoditization

Singapore — The Association of Southeast Asian Nations and Japan have furthered their push for destination flexibility in long-term LNG contracts with standardized clauses and new contractual documents, although their implementation is likely to take time.

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LNG buyers have been pushing to gain control of LNG cargoes in contracts extending up to 20 years, which were restricted to single destinations by large suppliers like Qatar. This ensured that cargoes could not be resold, limited the growth of trade routes and slowed the commoditization of LNG.

Last year, Japan's Fair Trade Commission declared restrictions on reselling contracted LNG were uncompetitive and in June this year the European Commission opened an antitrust investigation into restrictions on the free flow of gas sold by Qatar Petroleum in Europe.

However, industry participants have raised questions about how new contracts would be introduced and implemented, and the extent to which they will be compatible with commercial realities. It is also unclear whether existing contracts with LNG suppliers would be altered or only long-term LNG contracts that are being renewed would be renegotiated.

Institute of Energy Economics Chairman Masakazu Toyoda said the problem still lies in existing contracts, adding that if the market really wants an LNG price index in the Asia Pacific region instead of oil indexation it needs to have a flexible LNG market.


The ASEAN Council on Petroleum, ASCOPE, has published a standardized LNG contract without destination restrictions after conducting commercial and legal studies, Paramate Hoisungwan, chairman of the council's Policy Research and Capability Building Taskforce, said Monday.

He said ASCOPE has circulated the document to its member states including all key national oil companies in Southeast Asia, after a long process of consultations.

ASEAN's push to eliminate destination restrictions is unique in several ways.

It treats the 10 ASEAN nations as a single market, where the seller can deliver an LNG cargo to any terminal in Southeast Asia. This has several advantages for the buyer as it boosts energy security.

"LNG destination flexibility helps ASEAN members in normalizing supply if one of the countries needs LNG in an emergency situation. The countries can help each other," Hoisungwan said, speaking on the sidelines of the ASEAN Energy Business Forum in Singapore.

Secondly, it allows ASEAN to overcome regional imbalances as underdeveloped countries do not have high credit ratings or finances to import LNG on their own. Most importantly, the ASEAN contract balances the interests of both LNG buyers and sellers in the region, and even exporters like Malaysia, Indonesia and Brunei are willing to drop destination restrictions in exchange for access to more markets.

"We are also talking to Japan, Korea and China to expand our destination flexibility to other regions. With North Asia we have counter seasonality, as their region has peak demand in winter and we don't," Hoisungwan said.

But he added that other issues like LNG terminal compatibility and standardizing LNG specifications still need to be resolved.


On October 22, Japan's Ministry of Economy, Trade and Industry unveiled a model clause that can be used by LNG buyers to remove destination restrictions from long-term contracts.

Such restrictions have become more relaxed in renegotiations of LNG contracts or in new contracts among market players, Hiroshige Seko, minister of economy, trade and industry, said at a conference in Nagoya last week.

"We in the government also intend to promote this movement and asked Japan-EU legal specialists to develop model clauses regarding destination restriction," Seko said.

The model clause was drafted under an agreement between the European Commission Directorate-General for Energy and Japan's METI, to promote a transparent LNG marketplace. It helps standardize the effort across several buyers.

The ability to divert cargoes, reload cargoes, access available terminal capacity and manage the risk attached to selling cargoes are essential ingredients in creating a more flexible LNG market, according to a summary of the final report from the EU-Japan workshops.

The 2017 study by the Japanese FTC had stated that Japanese buyers must not accept restrictive clauses in new and renewed long-term contracts, and review them in existing contracts as well. After the study was published several Japanese buyers succeeded in removing destination restriction clauses from new term contracts.

"Further similar studies by anti-monopoly authorities of other countries such as the US Federal Trade Commission or Korea Fair Trade Commission, if conducted, would deepen the discussion about the appropriateness of destination restrictions in the context of fair market competition," the IEEJ said in October.

-- Eric Yep,

-- Edited by Wendy Wells,