Results of FY2024 Survey on Destination Clauses and Price Indices in Fixed-term LNG Sales and Purchase Agreements concluded by Japanese companies

18th Nov 2024

Outline of the survey

• Objectives：This survey is the fourth year of a 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 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：July to August 2024 (one and half month response period)
• Survey Targets：A total of 22 Japanese LNG buyers (all companies cooperated with our survey)

 

1. Trend of the destination restrictions in the term contracts

• The Annual Contract Quantity (ACQ) for which destination restrictions were imposed is to decrease from 28 MT or 39% (total ACQ of 72 MT) in FY2023 to 21 MT or 34% (total ACQ of 60 MT) in FY2030. The ACQ for which destination restrictions were imposed from FY2022 to FY2023 decreased slightly from 42% to 39% of the total.
  • According to the past surveys, the ACQ for which destination restrictions were imposed in FY2016 was 46 MT, 75% (total ACQ of 61 MT), and  in FY2022, 33 MT, 42% (total ACQ of 79 MT), respectively.
• For the purposes of this study, the following terms are defined as below;
  • “No destination restrictions" is defined as the contract quantity that is the sum of "no destination clauses" and "cases in which diversion of destination to domestic or overseas are allowed and no profit-sharing clauses are imposed”.
  • “Destination restrictions imposed" is defined as the total contract quantity minus the “no destination restrictions" quantity above, which means "cases where a destination is specified" and "cases where profit-sharing clauses exist even if the diversion of destination to domestic or overseas is allowed”.

2. Take or Pay clauses and Make Up clauses

• The ACQ to which the Take or Pay clauses apply was 67 MT in FY2023, accounting for 93%, but is to decrease to 52 MT, or 89% in FY2030. Of the ACQ with Take or Pay clauses, those with Make Up clauses accounted for 76% in FY2023 and 60% in FY2030.
• Take or Pay clauses impose an obligation for buyers to pay sellers for all the ACQ except for Downward Quantity Tolerance (DQT), including the quantity that buyers do not actually receive, and it is a contractual commitment by buyers, reflecting the seller's strong position. Make Up clauses provide that the paid-up quantity can be delivered during a certain number of years after the next fiscal year.

3. Total annual contract quantity (ACQ) 

• The ACQ of the fixed-term SPAs concluded by Japanese companies as of this survey was 72 MT in FY2023 and to be 60 MT in FY2030.
• As of FY2023, the ACQ for FOB and DES terms and their respective shares were 33 MT or 46% for FOB terms and 39 MT or 54% for DES terms.
• In FY2030, the ACQ for FOB and DES terms and their respective shares were 31 MT or 51% for FOB terms and 28 MT or 49% for DES terms.

4. Diversity of Price Indices adopted

• With regard to the price index adopted for term contracts, the price of “JCC, Brent, and other crude oil prices” accounted for 70% (51 MT) in FY2023, but this share is to drop to 58% in FY2030, decreasing to 34 MT.
• Contract quantity with the Henry Hub and other U.S. spot gas price indices accounted for 16% (11 MT) in FY2023, and increase to 14 MT in FY2030, increasing its share to 24%. The hybrid method, which combines two or more price indices, shows an increase from 3% in FY2023 to 7% in FY2030. The quantity of JKM and TTF contracts decreases toward FY2030 and their share to be small.