LNG Destination Clauses May End: IGU

Posted by Joseph Keefe February 25, 2015

Destination clauses on contracts for liquefied natural gas (LNG)shipments will soon be a thing of the past because of the shale revolution in the United States, the head of the International Gas Union said in an interview.

Japan and other buyers of LNG have long complained that the destination clauses on multiple-year term contracts place an unfair restriction on trade of the fuel.

Those objections have been rebuffed by producers up until recently, but that is changing as the United States is on the verge of becoming a gas exporter.

The conversion of U.S. sites formerly planned as import terminals into liquefaction plants - after its natural gas output surged with the use horizontal hydraulic fracturing - has meant that supplies contracted for deliveries to the United States often have no market.

"It will be more and more difficult to maintain destination clauses, based on the recent experience with the reverse of the U.S. market," Jerome Ferrier, the president of the International Gas Union told Reuters in an interview.

"It doesn't make sense to send Yemen production with the destination Boston in the U.S. when there is no market and not accepting to send (the cargo) to Asia ... sharing the margin or the advantage of such a reroutage," Ferrier said.

Boston, Massachusetts, is the main destination of the few LNG cargoes still heading into the United States, which has been taking less than 2 million metric tonnes of gas a year over the last few years - versus plans to export around 50 million tonnes a year by 2018 out of projects on the U.S. Gulf Coast.

Spot LNG prices <LNG-AS> are currently at about $6.70 per million British thermal units (mmBtu), less than a third of where they were a year ago. That has taken the sting out of complaints by Asian buyers that they are charged an excessive premium to other regions because of the tradition of linking LNG contracts to oil prices.

But buyers including Tokyo Gas Co are still pushing for destination clauses to be removed so they can trade their contractual purchases when it would make more economic sense to sell into other markets.

The standard destination clauses in most long-term LNG contracts restrict where shipments of gas can be unloaded and prevent buyers from selling on excess cargoes.

In Japan, which buys about a third of global LNG shipments, all nuclear reactors have been shut down following the Fukushima disaster of 2011, pushing up its demand for the super-chilled gas over the past four years.