Japan LNG Import Contracts – The JFTC Reports

Energy & Infrastructure Alert | June.30.2017

日本語:日本におけるLNG 輸入契約 – 公取報告書

The Japanese Fair Trade Commission (JFTC) on June 28, 2017 issued its much-anticipated report into the state of the market for contracted long term LNG supplies into Japan‎ (available here). The report made a number of key observations.

The following contract provisions and behaviours could, prima facie, be in violation of the Antimonopoly Act (Unfair Trade Practices: Trading on Restrictive Terms) because of the potential for foreclosure of the Japanese gas market:

Destination clauses and diversion conditions - with a recognition that this will particularly be the case for fixed-term FOB contracts; for DES contracts a destination clause intended to define a delivery point might not be problematic, nor would be the necessity for a seller’s consent to diversion unless the seller unreasonably refuses its consent or, on an operational or contractual basis, requests competition-restraining requirements for a diversion. Unreasonable refusals by sellers of diversion requests, where the contract does not include a destination clause, could also be caught.

Profit sharing mechanisms as a condition of diversion– these clauses under fixed-term LNG contracts could prevent Japanese users from reselling LNG to other users if they have the effect of decreasing the resale profit for the buyer and of depriving users access to the buyer’s resale, depending on the calculation methods and the distribution ratios of resale profit used.  This is particularly so for FOB contracts; for DES contracts it might not be unreasonable for a seller to require compensation from a buyer in exchange for giving consent to a diversion, unless this led to unreasonable profit sharing in favour of a seller.

Take or pay clauses - when a seller’s bargaining position is superior to that of a buyer and the seller unilaterally imposes take or pay clauses and strict minimum purchase obligations without sufficient negotiation with the buyer, particularly where the seller has already received a sufficient return for initial investment and does not need the take or pay commitment to reimburse its sunk capital costs. 

The JFTC's report concludes with the suggestion that (1) when LNG sellers conclude a new contract or revise a contract after its expiration then the contract must be careful not to apply competition-restraining clauses nor business practices which lead to restrictions on resale; and (2) for existing contracts LNG sellers should also review them for competition-restraining business practices which lead to restrictions on resale.  The JFTC also warns that it will keep monitoring the LNG market and will take strict actions against any violations.

The JFTC’s report has started a subtle but seismic shift in the landscape for contract terms for LNG supplies into Japan.  What the report says will set a level of expectation for Japanese LNG buyers that changes to future contracting behaviours from LNG sellers‎, and even changes to existing contract terms, are expected.   Sellers of LNG into Japan would be wise to recognise the implications of the JFTC's report and should think carefully about what sort of contract workarounds might now be necessary if they want to maintain their current and prospective interests in the world's largest LNG import market.