Current weak prices for spot liquified natural gas (LNG) will have no impact on arbitration over a long-term sales and purchase (SPA) contract between Osaka Gas, one of Japan’s largest gas utilities, and the ExxonMobil-led $19 billion Papua New Guinea (PNG) project, Oil Search Ltd.’s Ian Munro, executive vice president for gas marketing, said on Tuesday.
Australian Stock Exchange listed Oil Search is the largest oil and gas producer in PNG and one of the lead partners in the PNG LNG project, which has a liquefaction capacity of 6.9 million metric tons/year.
Munro said each SPA with a customer is tailor-made, so it was hard to generalize how an arbitration might play out. "An arbitration may or may not be able to rule on price. Any subsequent negotiations may or may not be retroactive," he said. "It's very much bespoke and it will certainly play out over the next few years."
In July, Osaka Gas began a price review arbitration against the PNG LNG project, marking the first time a Japanese buyer made such a move. In the past, parties have relied on negotiating an agreement. Typically, arbitration is considered a last and costly step for buyers.
Long term LNG offtake contracts in the Asia-Pacific region have historically been linked to an oil price indexation, while some contracts with Japanese buyers have been linked to the average price of oil delivered to Japan.
In the past three years the price of spot LNG in the Asia-Pacific region, which accounts for around two-thirds of global LNG demand, has trended downward as more supply enters the market, first from Australia and now the United States and Russia.
Japan is the current LNG import leader, followed by China and South Korea. However, because of a ramp-up in gas usage to meet government gas mandates, China is projected to bypass Japan within the next few years.
According to data from Japan’s Ministry of Economy, Trade and Industry (METI) the average price in July of imported spot LNG was $4.70/MMBtu, down from $5.50/MMBtu the previous month. The average price of spot LNG imported to Japan in July 2018 averaged $10.00/MMBtu, according to METI data. Spot LNG refers to LNG that is traded on a cargo-to-cargo basis, and does not represent term contracts.
The Japan Korea Marker prices reached multi-year lows in early August, dipping below the $4.00/MMBtu price point amid warmer temperatures in North Asia, an ongoing LNG supply overhang and reports of ample gas inventories in Japan, China and South Korea.
As spot prices continue to drop to multi-year lows, buyers in the region have been keen to renegotiate long-term supply deals for more favorable prices in addition to removing restrictive destination clauses.
India’s top gas importer Petronet LNG said earlier this month it is also considering renegotiating long-term LNG supply deals if spot prices remain weak. Lower prices have already caused LNG buyers in Japan and China to postpone deliveries of contracted cargoes, while some are also considering lifting less volumes under their contracts.