Japan will pay for LNG tweak, says Woodside
Japan will need to pay more for its liquefied natural gas contracts if it succeeds in its legal effort to unwind long-held destination restrictions, Woodside Petroleum chief executive Peter Coleman says.
Japan’s influential Ministry of Economy, Trade and Industry is reportedly preparing a legal challenge contesting certain LNG contract clauses as anti-competitive in what shapes as a potentially significant risk to Australia’s producers.
The METI wants to unwind contractual restrictions that specify the destination of the LNG cargoes, which currently limit the ability of Japanese utilities to on-trade surplus gas to other markets.
The legal fight opens up the possibility that many of the long-term offtake agreements underpinning Australia’s $200 billion-plus of LNG projects may need to be rewritten.
But Woodside’s Mr Coleman told The Australian he was not concerned about the potential change.
“When these (destination) clauses are put into contracts they are not put in there in isolation; they are generally put in there as a trade-off against something else,” he said.
“It has value to us as a seller and the buyer gets something else back in another part of the contract. If existing contracts were opened up we would expect something in return for other accommodations in other parts of the contract.”
That could be a higher price or other conditions, he said.
Mr Coleman also noted that any increased flexibility that emerged from the legal challenge could help boost Woodside’s growing LNG trading business.
“You’re seeing in general a move away from destination clauses in new contracts and that works for us as well because that’s why we’ve set up a trading capability and a shipping capability,” he said.
“We could see the world was moving this way anyway — Europe had already moved to this point — so I don’t see anything in existing contracts to be concerned about.”
While gas supply agreements are generally designed to last 20 years, given the massive upfront costs in developing gas infrastructure, there are examples of contracts being renegotiated or overturned.
A deal between Qatar and India was renegotiated following government intervention, while the European Union declared elements of gas supply deals with Russia anti-competitive.
Deloitte Australia’s national director of oil and gas Geoffrey Cann said the Japanese challenge represented a “very serious” issue for the LNG industry.
“This move by the Japanese has very far-reaching ramifications,” he told The Australian.
“It’s like pulling a thread on a sweater: the whole thing starts to unravel.”
The situation also underscored a broader issue in Japan, which he said had simply committed to too much LNG for a population that will fall by up to 50 million people by 2050.
“With a shrinking population, the interest in getting their nuclear fleet back up and running, and (international carbon reduction) regulations pressing down, the Japanese are in a bit of a pickle,” he said.
Any success by Japan could speed up the move of LNG prices away from their historic linkages to oil price by substantially increasing the amount of gas available on the spot market. But he said smaller markets that had not had the scale or financial capacity to commit to long-term gas contracts might now be able to source gas.