An inexorable drop in market prices for liquefied natural gas is pushing utilities in Japan to be more aggressive in pricing built on traditional long-term contracts linked to oil prices, lawyers and analysts said.
The services are also looking to buy more LNG in the domestic market, where prices have been dropping for three years and are about half the average contract import price for buyers in Japan, the world’s largest importer of fuel for power generation and industrial use.
The tougher stance marks a shift for Japanese services, which have long favored price stability over price, in part because they have been able to pass on costs to consumers.
But liberalization in Japan’s energy markets means that old guard services are losing customers in front of new entrants, and they are desperate to cut costs.
“Given the liberalization of the gas and energy markets and the intensification of domestic competition in Japan, it is very important for Japanese services to achieve competing LNG prices, so price review negotiations are becoming more intense,” Thanasis Kofinakos said. head of LNG gas and consultancy, Asia Pacific, at Wood Mackenzie.
According to reports, including one from Bloomberg, Japan’s second largest gas company in the city, Osaka Gas, is in arbitration with the Exxon Mobil Corp PNG LNG project in Papua New Guinea after failing to take a price cut during a price review.
“We refuse to comment on every detail of the price negotiations,” said Osaka Gas spokesman Takahiro Yamane. Exxon Mobil, operator and trader of PNG LNG, also declined to comment.
“(The price review) negotiations did not end in a settlement and so arbitration is the next available contracting recourse,” Kofinakos said, adding that it was possible for more contract reviews to go to arbitration.
He said it was the second prize arbitration in Asia, after the Australian North West Shelf LNG – operated by Woodside Petroleum began proceedings against the South Korean Gas Corps last year.
But even if Osaka Gas manages to cut prices, they are unlikely to be more than 5% below the contract price, said a gas executive who has been involved in many LNG projects and price revisions.
He said “The last company you want to take over is Exxon.”
Japan’s average import price of LNG into a thermal heating unit was almost double the price point for fuel in June. Spot prices have fallen to more than a three-year low.
Arbitration is risky and also costly, costing as much as $ 15m, said a Singapore-based lawyer who deals with LNG contracts.
One source for services is to buy more loads locally and many have said they are trying to do so.
But utilities are also limited in the number of on-site cargoes they can receive because most of their supply is fulfilled through long-term binding contracts.
This is a departure from the 2011 Fukushima disaster that shut down Japan’s nuclear reactors, which had met 30% of the country’s power needs. Without the reactors, electricity services rushed to sign long-term gas contracts, many of which are just getting started.
“It remains to be seen whether the negotiations will succeed in resolving price discontent, and if they do not, whether buyers will backtrack or initiate (arbitration) proceedings,” said a Tokyo-based lawyer specializing in gas projects ./Investing.com