Despite Low Oil Prices Asian LNG Buyers May Not Go for JCC Only Price Indexation

Although recent drop in oil prices has weakened the argument that oil-price indexing is disadvantageous for customers, Asian buyers may be reluctant to go back to JCC-only price indexation even with strong price review provisions in future contracts, Vivien Yang, partner with law firm Simmons & Simmons in Hong Kong, wrote in Nikkei Asian Review on Wednesday.

The emergence of Asian LNG trading hubs will create open spot markets with prices determined by supply and demand, similar to the oil trade, she said. “Once Asian LNG hubs are established, they will provide more options for index pricing, including hybrid indexation. It is very likely that the market for long-term LNG contracts will shift toward prices based on LNG/natural gas prices in one or more of the Asian LNG hubs.”

Asian buyers will continue to seek more flexibility in destination and resale conditions in response to reduced demand, emergency situations, weather conditions or simply profit opportunities.

Japan's Fair Trade Commission is investigating destination restrictions and its findings could be announced by early 2017. If the commission finds these restrictions violate Japan's fair trade laws, that would lead to the renegotiation or ending of these restrictions in long-term contracts governing Japanese LNG imports, Yang said adding that other Asian LNG countries could follow suit, which could promote the development of Asian LNG hubs.

Despite the current slowdown of Asian LNG demand, Asia is likely to continue to drive the development of the global LNG market. Asian buyers will continue entering into long-term contracts to diversify and mitigate risks that cannot be addressed in spot trades, which include risks arising from natural disasters, political instability, and potentially tighter supplies due to a lack of investment resulting from low oil prices.