JFTC report on LNG trade set to reshape relations between buyers, sellers
7 July 2017. By Sachiko Sakamaki.
Relations between sellers and buyers of liquefied natural gas in Japan — the world's largest LNG importer — are set to go through a steady but significant shift in favor of buyers, after a major report by the country's antitrust regulator recently determined that some resale restrictions by sellers are anticompetitive.
The Japan Fair Trade Commission's 174-page report, released last week, found that resale restrictions such as "destination clauses" in long-term free-on-board, or FOB, contracts, are anticompetitive because the buyer is responsible for the cargo from the shipping port. Even in ex-ship, or DES, contracts, in which the seller is responsible for delivering the fuel to the destination port, the JFTC determined that restricting cargo destinations can be anticompetitive under certain conditions.
The regulator's report comes at a time when Japan's LNG market is awash in supply, and buyers are pushing to be able to redirect supplies to other buyers, such as neighboring countries that are expected to need more fuel.
The JFTC said that LNG sellers should not include restrictive clauses in new contracts and should review practices that restrict competition in existing contracts. It said even in long-term DES contracts, a refusal by sellers to permit destination diversions is highly likely to be an antitrust violation.
This is likely to lead to a process in which Japanese buyers negotiate improved conditions with sellers on new and current contracts, reshaping the competitive landscape of the LNG market in Japan.
Rupert Lewi, a partner at King & Spalding in Tokyo, said there won't be a rush to renegotiate existing contracts, because the report only called for LNG sellers "to at least review competition-restraining business practices" in relation to those contracts. Instead, the JFTC findings — coupled with market conditions in which a surplus of LNG is expected to last until around the mid 2020s — might encourage Japanese buyers to seek more flexibility and diversions on an individual-cargo basis, rather than requesting renegotiations of existing contracts.
Jera, Japan's biggest LNG importer, told MLex that the company would request destination-free agreements from sellers without trading off something else, now that the regulator has found destination clauses basically illegal.
"This is no longer a bargaining chip but a legal matter," Jera spokesman Atsuo Sawaki told MLex in an interview. He added that the JFTC report is "enormous support" for his company, which hopes that destination clauses will be eliminated from LNG contracts to Japan over the coming 10 years in a way similar to how such restrictions were removed in Europe over the course of the past decade.
For new contracts, Jera is planning to make only destination-free agreements and will decide what to do with existing contracts after informing its sellers of the JFTC's findings, Sawaki said.
The impact of the JFTC report may not be limited to Japanese buyers, Lewi said. Major Asian LNG importers such as South Korea's Korea Gas may seek a similar position with sellers so as not to be at a disadvantage to Japanese buyers.
Kimitoshi Yabuki, an antitrust lawyer at Yabuki Law Offices, said that destination clauses may be on their way out over the coming years, following the JFTC findings. He added that sellers will have to have compelling arguments for including such clauses even in DES contracts.
Questions remain, however, on the JFTC's stance on so-called "take-or-pay clauses," which oblige buyers to pay for all of the contracted volumes. Such clauses are often included in LNG contracts to secure financing for project loans to cover the massive amounts of initial investments involved in developing LNG.
The JFTC said take-or-pay clauses are not in themselves anticompetitive, but they can be when a seller's bargaining position is superior and when the seller unilaterally imposes such conditions.
All of Japan's LNG buyers are large companies, such as electricity and gas companies, not weak subcontractors. Especially under the current buyers' market, sellers might feel that buyers are in the superior bargaining position and that sellers are not in a position to have "unilaterally imposed" take-or-pay clauses and strict minimum purchase obligation without "sufficient negotiation," he added.
He also questioned the rationale of the JFTC when it sought in the report to make a distinction between situations where the project finance loans are repaid or not, and whether suppliers have received a sufficient return on their initial investment. These are not directly competition matters and it is not clear how "sufficient return" is measured.
Competition regulators in other jurisdictions haven't raised the issue of take-or-pay clauses in LNG contracts and the JFTC's position on superior bargaining position is not widely accepted by other regulators.
There is also the issue of jurisdiction in international disputes arising between a Japanese buyer and a foreign seller. For instance, if a Japanese buyer — emboldened by the JFTC's report —diverts cargo against an FOB contract and the seller sues the Japanese company, FOB contracts are governed by the laws of the exporter's country and arbitration is usually held in a third-party country. Even though the Japanese buyer might resort to the JFTC's position in defending itself, it's unclear whether that view would prevail in a foreign jurisdiction.
On the domestic front, however, it is a situation of sellers beware. Now that the JFTC report is public, Japanese buyers may bring complaints to the regulator when they experience possible violations, which could lead to the JFTC opening an investigation. The JFTC said in the report that it would monitor the market and take strict action against any violations.
For now, though, it is more likely that buyers and sellers will resolve their disputes between themselves, because shipments must continue unless a contract is terminated.