renegotiation of a 20-year liquefied natural gas (LNG) contract to lower the
price paid by India's Petronet LNG to one of its suppliers, ExxonMobil,
demonstrates the risks faced by LNG exporters in the oversupplied APAC market,
says Fitch Ratings on 12th Sept. Larger LNG importers, such as
Japan, South Korea and China, have a strong bargaining position and could push
for renegotiations in their own long-term deals.
A ramping up of LNG production in
Australia and the commencement of LNG imports from the US in August 2016 has
pushed up supply in the APAC market and put downward pressure on spot prices.
Spot prices are now well below those agreed in most existing contracts. Further
production increases are in the pipeline, which in an already oversupplied market
is likely to keep prices under pressure in the medium term.
Market conditions have increased the
bargaining power of buyers, which is evident from their increased preference
for spot instead of term contracts. Shorter terms are also being sought. LNG
contracts are typically drawn up for 20-25 years, but there are reports of
buyers looking for 10-15 year terms.
Renegotiation of existing contracts
takes this a step further. Cases have been rare so far, with the renegotiation
between Petronet and Exxonmobil the first instance in APAC involving a contract
that uses a standard pricing benchmark. It could create pressure for the
renegotiation of other LNG contracts. ExxonMobil has agreed to accept lower
prices and to absorb freight costs. It has reportedly reduced prices to less
than 14% of Brent from 14.5% on already-contracted supplies, and accepted 12.5%
on additional supplies. The alternative may have been termination of the
contract by Petronet, which would have forced ExxonMobil to sell output at spot
and pursue damages in court.
India is a relatively small, if growing,
importer of LNG. The larger importers that have not so far looked to
renegotiate contracts could have a much more significant impact on exporters.
Japan accounts for around 32% of global LNG imports, South Korea for 13% and
China for 10%. India accounts for 7%, slightly more than Taiwan, at 6%.
The market power of Japanese buyers was
enhanced by the merger of TEPCO Fuel & Power and Chubu Electric Power Co in
April 2015. The new entity, JERA Co, is now the largest LNG buyer in the world.
It is reportedly aiming to cut the proportion of its purchases covered by
long-term contracts to around 50% from 80%-90%. JERA also signed a memorandum
of understanding in March 2017 with Korea's KOGAS and China's CNOOC to
collaborate in the LNG market, including through the joint procurement of LNG.
These three companies, which account for one-third of global LNG demand, are
seeking more flexibility in their contract terms with producers. In particular,
they are pushing for a change that would allow them to re-sell LNG imports to
third parties, which would further weaken producers' global pricing power.
LNG producers in APAC could face greater
earnings pressure if there was a concerted push for renegotiation of existing
contracts by major north Asian buyers. Origin Energy Ltd (BBB/Negative), which
has a 37.5% stake in Australia Pacific LNG (APLNG), appears the most exposed
among Fitch-rated companies in APAC. Its Negative Outlook captures the impact
of LNG market weakness on its credit profile, including the risk of lower
dividend receipts from APLNG. Conversely, price reductions would be positive
for LNG buyers in APAC.