February 13, 2018 / 7:06 AM / 2 months ago

As KOGAS goes into LNG arbitration, others may follow

    * Pressure mounts on sellers to grant more flexible terms
    * Many long-term contracts up for review in Asia
    * Europe's experience provides arbitration precedent

    By Henning Gloystein
    SINGAPORE, Feb 13 (Reuters) - A move by Korea Gas Corp
(KOGAS) to seek arbitration over the terms of a liquefied
natural gas (LNG) contract with Australian exporters could
herald a shake-up of the region's LNG market as other buyers
follow suit, analysts and experts said.
    Asian buyers have so far resisted taking on producers over
pricing or what they see as restrictive clauses in long-term
contracts, some stretching out for decades, but abundant
supplies look to be driving a change of heart.
    Changes to clauses, particularly on pricing and those
prohibiting buyers from on-selling cargoes, could lead to a
surge in LNG trading, echoing the European experience after a
wave of arbitration cases five to 10 years ago.
    "We see Asian markets in a similar position as the European
gas market was 10 years ago," Madjid Kuebler, an arbitration
expert and managing director of energy consultancy Team Consult,
said in an email.
    "We believe that contractual disputes, including arbitration
proceedings, are on the increase," he said.
    Most of Asia's LNG is supplied under long-term deals that
ensure buyers get steady supplies, while producers obtain a
stream of revenue.
    Before 2014, when supplies were tight, buyers were willing
to sign up to terms that offered little flexibility.
    But with LNG now more abundant thanks to production rises
from Australia to the United States, Asian buyers have started
to demand better terms.             
    Producers including Australia's Woodside Petroleum         
and Royal Dutch Shell          have said they are open to
negotiating new contracts with more flexibility, but they have
resisted granting changes to existing deals.             
    The decision by state-run KOGAS to enter court-administered
arbitration with Australia's North West Shelf joint venture over
pricing is the first known such case in the Asia/Pacific region.
            
    "Asian buyers and their counterparties have traditionally
preferred to avoid litigation under long-term LNG contracts.
However, the market is changing," said James Taverner of energy
consultancy IHS Markit.
    Analysts expect more Asian cases.
    More than 15 LNG contracts are either under price review, or
have price reviews coming up this year, accounting for over 15
percent of North Asian LNG supply, said Saul Kavonic of energy
consultancy Wood Mackenzie.
    Supply contracts go into arbitration when counterparties
fail to agree terms during regular term reviews, but how many of
these reviews will end up in arbitration is unclear.
    "There is usually very little public information revealed
about LNG arbitration cases," said Taverner.
    
    THREE STICKING POINTS
    The main sticking points in fixed LNG supply contracts are
"take or pay" clauses forcing buyers to pay for cargoes even if
they don't need them, "destination clauses" preventing buyers
from selling on cargoes, and an oil-link to the price of LNG.
    Buyer demands received support when regulators in Japan, by
far the world's biggest LNG importer, said in mid-2017 that
restrictions on reselling cargoes were illegal.             
    IHS's Taverner said the industry "will be watching price
reviews and the prospect of any arbitration closely." 
    Australia's Macquarie bank said in an earnings preview for
Woodside that 2019 earnings "will fall as Pluto's (export
facility) foundation contract comes up to re-pricing" with
Japan's JERA.
    JERA has said it will cut the amount of long-term contracts
and seek more flexible terms with any future deals. It has
already done so with Malaysia's Petronas.
                        
    Poten and Partners, an LNG consultancy and brokerage, said
in a note "contract sales fell to less than 22 million tonnes
per year in 2017, down from more than 30 million per year in
2016."
    This fall came despite a 20 percent rise in global LNG
demand last year.
    

    
 (Reporting by Henning Gloystein
Additional reporting by Jessica Jaganathan in SINGAPORE and
Sonali Paul in MELBOURNE; editing by Richard Pullin)
  
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