More flexible LNG terms key for Japanese buyers: Jera

Japan's largest LNG buyer Jera is calling for more flexible terms in long-term LNG contracts as the country faces a significant reduction in LNG demand because of Covid-19 and uncertainty over future demand levels as gas and power markets evolve.

"Long-term SPAs [sales and purchase agreements] with rigid terms are no longer suitable for a rapidly changing market," Hitoshi Nishizawa, senior executive officer at Jera, said at the CWC Japan LNG virtual summit today. He called for more consideration around flexibility, tradeability and price creativity.

Jera is the world's largest buyer of LNG.

Nishizawa suggested more volume and destination flexibility are needed to meet buyers' evolving needs, as well as a creative approach to pricing. A few Japanese buyers including Jera have likely succeeded in negotiating for these concessions with long-term suppliers.

The current situation of reduced demand and oversupply highlights the importance of greater flexibility and tradeability in long-term contracts. Japanese buyers are already "heavily burdened" with demand uncertainty, following the deregulation of the country's gas and power markets that has left some buyers overcommitted, he said.

Japan's LNG imports in May fell by 18.9pc from a year earlier and by 12pc against April to 4.5mn t, as the Covid-19 outbreak suppressed industrial demand for incremental spot cargoes because of high inventory levels.

Japanese utilities have "taken every effort" to manage their high stock levels through effective terminal operations, cargo deferrals, cancelling offtake from US projects and exercising their right to reduce annual contracted quantities, Nishizawa said.

Both power and gas utilities continue to struggle with mounting deliveries, with several still in negotiations with suppliers to defer cargoes until the very end of the year or reduce their contracted offtake. An executive at a gas utility told Argus his firm has had limited success with deferral requests, with suppliers agreeing to postpone June and July deliveries only by a few days.

Japanese buyers have been pushing for more contract flexibility in recent years, including the removal of destination restriction clauses. This would allow them to freely sell cargoes in the event they are unable to receive them. Destination restrictions in a contract typically require a buyer to receive a cargo at a specified receiving terminal or a specified geographical area.

The moves followed a call in 2017 by the Japan Fair Trade Commission for the removal of destination restrictions from LNG contracts, which it said prevent the resale of LNG and could violate the country's anti-monopoly law.

By Camille Klass