Results of Survey on Destination Clauses and Price Indices in Fixed-term LNG Sales and Purchase Agreements

5th Oct 2021

Outline of our survey

• Objectives：The purpose of our survey is to follow up on the contract terms and conditions related to destination restrictions in fixed-term LNG sales and purchase agreements (SPAs) since the Japan Fair Trade Commission's "Survey on LNG Trades” published in June 2017 (JFTC Survey) in view of abolishment or relaxation of destination clauses, which cause a concern for LNG security, based on the "New International Resources Strategy" formulated in March 2020 by the Ministry of Economy, Trade and Industry.
• Survey Period：June to August 2021 (two-month response period), briefing sessions were held prior to the survey.
• Survey Targets：A total of 22 Japanese LNG buyers (all companies cooperated with our survey.)

 

1. Total annual contract quantity (ACQ) and DES/FOB terms

• The annual contract quantity (ACQ) of the fixed-term SPAs concluded by Japanese companies peaked at 86 Mt in FY2020, and then declines to 62 Mt in FY2025. Of this total, the ACQ of new contracts concluded after the JFTC Survey is 8 Mt as of FY2020, and remains almost unchanged thereafter, and the ACQ of existing contracts with revised destination clauses after the JFTC Survey is around 15 Mt after FY2020.
• The ratio of DES terms to FOB terms has increased from 70% for DES terms and 30% for FOB terms in FY2016 to 47% and 53%, respectively, in FY2025, with FOB terms accounting for half of the total.

2. Changes in destination restrictions

• As a result of our study, the ACQ for which destination restrictions are imposed will decline from 75% (46 Mt) in FY2016 to 46% (29 Mt) in FY2025.
• According to the JFTC Survey, the destination restrictions mean a certain extent of restrictions on buyers in free designation and diversion of destination. The survey points out that if the destination restrictions exclude or lessen new entrants and trading opportunities, such conduct is, in principle, in violation of the Antimonopoly Act. In our study, the destination restrictions is defined as the sum of the ACQ where the diversion of destination to domestic or overseas are not allowed and the ACQ where the diversion of destination to domestic or overseas are allowed but there are Profit Sharing clauses. The ACQ without destination restrictions refers to the ACQ where diversion of destination to domestic or overseas are possible and there are no Profit Sharing clauses.

3. Comparison of destination restrictions after JFTC Survey (2020FY)

• Comparing the changes in contract terms and conditions related to destination restrictions before and after the June 2017 JFTC Survey, with respect to ACQ in FY 2020, 71% of the ACQ concluded before the JFTC Survey in June 2017 have destination restrictions imposed, 57% of the total ACQ including new contracts concluded after the JFTC Survey, and 23% of the total ACQ newly concluded or revised after the JFTC Survey.
• In our survey, the items related to the destination restrictions were surveyed for (1) the ACQ concluded before the JFTC Survey, (2) the ACQ newly concluded after the JFTC Survey, and (3) the ACQ of existing contracts revised after the JFTC Survey (the number in (1)). The definition before the JFTC Survey is the ACQ as (1) minus (3).

4. Take or Pay clauses and Make Up clauses

• Take or Pay clauses accounted for 96% in FY2016, decreasing to 85% in FY2025. Of those with Take or Pay clauses, 78% have Make Up clauses and 22% have no Make Up clauses, a ratio that remains unchanged between FY2016 and FY2025.
• Take or Pay clauses impose an obligation for buyers to pay for all the ACQ, excluding the right of Downward Quantity Tolerance (DQT), including the volume buyers do not actually receive. In the JFTC Survey, it is stated that guarantee of sustainable and full payment of contract by users is an important element for a FID, but when the seller unilaterally imposes Take or Pay clauses without sufficient negotiation with the buyer even after the seller has already got sufficient return for initial investment, providing Take or Pay clauses are likely to be in violation of the Antimonopoly Act. The Make Up clauses provide that the paid-up quantity can be delivered during a certain number of years after the next fiscal year.

5. Diversity of Price Indices adopted

• With regard to price indices adopted in term contracts, crude oil prices such as JCC and Brent, which accounted for 93% (57 Mt) in FY2016, are on a downward trend, with their share declining to 66% (41 Mt) in FY2025.
• The adoption of U.S. spot gas price indices such as Henry Hub is increasing in line with the increase in LNG imports from U.S, with its share expanding from 1% in FY2016 to 17% (10 Mt) in FY2025. In addition, the proportion of hybrid methods that combine more price indices is also increasing, indicating that the adoption of a diversity of price indices is progressing. The number of term contracts using JKM and TTF as price indices is still very small, amounting to several hundred thousand tonnes.