* S.Korea's KOGAS, Japan's JERA, China's CNOOC sign MOU
* Top LNG buyers to work together to get flexible LNG
* Glut means producers are under pressure to grant
(Recasts, adds background on buyers' clubs, producer comments,
Qatar official, detail on WTO and market impact)
By Jane Chung, Yuka Obayashi and Oleg Vukmanovic
SEOUL/TOKYO/MILAN, March 23 The world's biggest
liquefied natural gas (LNG) buyers, all in Asia, are clubbing
together to secure more flexible supply contracts in a move
which shifts power to importers from producers as oversupply
Korea Gas Corp (KOGAS) said on Thursday it had signed a
memorandum of understanding in mid-March with Japan's JERA and
China National Offshore Oil Corp (CNOOC) to exchange information
and "cooperate in the joint procurement of LNG."
Together, the three companies purchase a third of global LNG
production, giving them a strong hand to challenge restrictive
contract terms that have squeezed buyers' finances.
Influential buyers' clubs are largely unheard of in
commodity markets where it is the producers, such as the
Organisation of Petroleum Exporting Countries (OPEC), who wield
power, enforcing production quotas to manage prices.
A painful period of high LNG prices before 2014 left Asian
importers scrambling to contain losses and led to the first
talks between India, Japan, South Korea, China and Taiwan about
Several joint LNG-buying deals have been set up since then
but none approach the scale of the latest agreement, which is
the first involving the game's biggest players.
Under Thursday's agreement, the buyers aim to extract
concessions from producers that would give them supply
flexibility, such as having the right to re-sell imports to
third parties, something they are not allowed to do currently
under so-called destination restrictions.
"We have created a platform to share, discuss and solve our
common issues such as traditional LNG business practices,
including destination restrictions," said JERA spokesman Atsuo
The alliance of three big buyers across three countries will
put pressure on exporters such as Qatar, Australia and Malaysia.
They prefer to have clients locked into fixed supply contracts
which run for decades and make buyers take fixed amounts of
monthly volumes irrespective of demand, with no right to re-sell
surplus supplies to other end-users.
The agreement has been helped by the fact the power wielded
by OPEC is unparalleled in the commodities world. Attempts to
create an OPEC-style body through the Gas Exporting Countries
Forum has failed to gain traction because gas and LNG markets
are more fragmented than oil, while similar moves in coffee,
railroads, rubber and tin have all collapsed over the decades.
The LNG market is undergoing huge changes as the biggest
ever flood of new supply is hitting the market, with volumes
coming mainly from Australia and the United States.
JERA, KOGAS and CNOOC will all struggle with having excess
supplies in the next few years, sources at three major LNG
producers told Reuters, curbing the consortium's ability to
strike any new deals this decade.
Reworking existing deals, however, is feasible and may hit
the world's biggest producer Qatar the hardest as many of its
mid-term supply deals with Japan start to expire from around
2023, industry sources said.
A senior Qatar Petroleum official hinted that buyers -
emboldened by temporarily oversupplied markets to demand better
terms - may come to regret their actions when the cycle turns.
"Right now the market is over-supplied but if we went into a
period of a tighter market, how would these buyers organisations
hold up? That is an important question," the official said.
"If there is a market crunch and gas tightens it could
recreate incentives for buyers to lock in long-term contracts."
More practically, the deal complements the buying habits of
each company - KOGAS largely buys for winter, CNOOC for summer
and JERA across both seasons - offering opportunities for
swapping cargoes, industry sources said.
"Flexibility is becoming critical for LNG buyers ... as the
rise of solar capacity is going to make consumption of LNG more
seasonal," said Kerry Anne Shanks, head of LNG research for
Asia/Pacific at Wood Mackenzie.
PRESSURE ON PRODUCERS
New production has resulted in global installed LNG capacity
of over 300 million tonnes a year, while only around 268 million
tonnes of LNG were traded in 2016, according to Thomson Reuters
That has helped pull down Asian spot LNG prices LNG-AS by
more than 70 percent from their 2014 peaks to $5.65 per million
British thermal units (mmBtu).
It has also given importers more suppliers to choose from,
putting pressure on major producers like Royal Dutch Shell
, Chevron, ExxonMobil and Woodside
Petroleum to grant more flexible contract terms.
Companies forming cartels are difficult to challenge at the
World Trade Organization, which does not have rules about
anti-competitive behaviour and only governs trade relations
between member countries. But WTO rules do oblige state-run
firms to trade on commercial and non-discriminatory terms.
Thomas Cottier, a law professor and senior research fellow
at the World Trade Institute at the University of Bern, said the
LNG alliance may or may not comply with the WTO rules.
"To the extent that governments are directly or indirectly
involved, it may violate rules on state trading or the
prohibition to encourage voluntary export restraints. However,
conduct of private companies is subject to domestic anti-trust
law and is not part of WTO law," he told Reuters by email.
Even if an LNG supplier such as Qatar, Russia or Australia
launched a dispute at the WTO, several other major gas producers
such as Iran and Turkmenistan are not members of the WTO and
therefore have no right to have their complaints heard there.
(Additional reporting by Mark Tay in SINGAPORE, Sonali Paul in
MELBOURNE, Tom Miles in GENEVA, Tom Finn in DOHA; Editing by
Nina Chestney and Pravin Char)