JFTC uses big stick in Antimonopoly Act as it conducts market survey of LNG trading practices

20 March 2017 1:19pm

7 February 2017. By Sachiko Sakamaki.

The Japan Fair Trade Commission, or JFTC, is examining resale restrictions on imported liquefied natural gas by using an unusual tool in the Antimonopoly Act that allows the regulator to order companies to submit information or face a penalty — a move rarely used for purposes other than suspected antitrust violations — MLex has learned. The regulator is currently preparing a report based on interviews and written surveys of LNG buyers and exporters, it is understood.

Japan's Ministry of Economy, Trade and Industry, or METI, has been calling for the abolition or relaxation of resale restrictions in trade contracts with LNG exporters called "destination clauses." Last May, the ministry included this goal as one of its action plans for Japan's LNG market strategy, citing examples in Europe where territorial restrictions, including destination clauses, were found to be anticompetitive.

Japanese power and gas companies that increased their LNG import contracts following the nuclear accident at Fukushima in March 2011 — which led to a shutdown of the country's nuclear power plants — are expected to be flush with excess supply of LNG from this year on, so they want the flexibility to sell excess fuel to other Asian countries. Also, they want price indicators so that East Asian LNG prices, which are now linked to global crude oil prices and are much higher than LNG prices in Europe or North America, will move more in line with other market prices.

In response to expectations from METI and the energy industry, the JFTC conducted interviews last summer with LNG users, including power utilities and gas companies. In the autumn, the JFTC ordered them to submit information regarding resale restrictions on imported fuel. It is understood that the regulator sent out questionnaires around October, ordering the companies to respond by the end of November.

Also last autumn, the regulator interviewed LNG exporters, followed by written surveys around the end of the year, MLex has learned. One LNG exporter told MLex in late January that the company was preparing to answer the JFTC's enquiries.

It is understood that the JFTC used article 40 of the Antimonopoly Act, which allows the regulator to order companies to submit reports, information or materials to carry out its mission, a separate provision of the act from article 47, which allows such information gathering by the regulator in investigations of suspected violations.

A JFTC official confirmed to MLex that article 40 was deployed for the first time since around 1975, when the regulator conducted a price-related survey. The official declined to comment on why the regulator used that particular provision of the law, saying only that the JFTC was using the means that it sees as appropriate.

Antitrust lawyers said the JFTC probably used article 40 to overcome the non-disclosure agreements often included in trade contracts between Japanese importers and overseas exporters. Once a company receives a JFTC's order under article 40, it must disclose the information or face punishment.

The JFTC's research office on trade practices is understood to be preparing to publish a report on LNG trading.

Normally, such market surveys aren't a prelude to action by the regulator. But last year, after the JFTC published a report on the smartphone market in early August based on its survey of online businesses conducted jointly with METI, the JFTC raided Amazon Japan six days later — although the connection is unclear — and reportedly started investigating three major mobile carriers some months later.

The JFTC may be looking for an example to the European Commission, which opened an investigation into pharmaceutical companies following a market survey in 2008-2009, it is understood.

It remains to be seen how the JFTC's survey of the LNG market will develop. One antitrust lawyer said the regulator may issue warnings against some companies, while another said the JFTC is unlikely to open an investigation, citing the differences in LNG transactions between Europe and Japan. LNG is distributed through pipelines in Europe while it's shipped by tankers to Japan.

From the seller's standpoint, destination clauses started as a mutually beneficial arrangement, an official at a Southeast Asian LNG company told MLex. When Japan started importing LNG in the late 1960s, it needed to secure a stable supply of the fuel, while exporters needed a long-term commitment to cover exploration costs, which run into billions of dollars, the official said. Long-term contracts, such as 20 years, were common, and were often extended when they expired.

Over the years, however, Japanese LNG users started procuring LNG not only from Southeast Asia and the Middle East, but also from Australia, Russia and the US. In January, the first shipment of shale gas from the US arrived at Joetsu, on the west coast of central Japan, after sailing for a month from Louisiana on a tanker that keeps the fuel at minus 160 degrees Celsius.

Japan's largest LNG importer, JERA, which imported the first shipment of US shale gas, has been increasing LNG contracts without destination clauses. It's also aiming to increase the ratio of short-term and spot contracts from 12.5 percent of its portfolio last year to more than half by 2030.

In the long term, LNG sellers will have to become more flexible in contracts and nimble regarding their investment costs, the official from the LNG exporter said.

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