South Korea’s Korea Gas Corp (KOGAS) has entered court-administered arbitration with Australian joint venture North West Shelf Gas seeking to settle a dispute over a liquefied natural gas (LNG) contract that expired in 2016.
A spokesman for the state-run Korean firm confirmed to Reuters an arbitration process was under way, but declined to give details. Woodside Petroleum, operator of the North West Shelf venture, was not immediately available for comment.
The case, to be heard in a specialist arbitration court, will be closely watched by the global liquefied natural gas (LNG) industry. KOGAS is the world’s second-biggest single buyer of LNG, and Australia has ambitions to overtake Qatar as the world’s biggest exporter of the fuel.
The arbitration relates to a difference over price of a mid-term supply contract, a person familiar with the matter told Reuters.
Saul Kavonic of energy consultancy Wood Mackenzie said it was “the first time in Asia” an LNG buyer has resorted to taking an LNG price review negotiation to arbitration.
“Producers will be watching how the likes of the Chinese national oil companies, JERA (of Japan) and KOGAS choose to navigate upcoming price review opportunities, with large project value at stake,” Kavonic told Reuters.
South Korea imports most of its LNG via KOGAS, the country’s sole LNG wholesaler. The firm brings in more than 30 million metric tonnes per year of the fuel, mainly from Qatar and Australia.
Most of Asia’s LNG is supplied via long-term contracts under which buyers receive monthly cargoes. If they cancel supplies, payment is still due under so-called “take-or-pay” clauses.
Additionally, “destination clauses” prevent buyers from selling LNG to third parties.
To protect buyers and sellers from sharp price swings, the LNG under most long-term contracts is linked to oil, which caps by how much the price for LNG can rise or fall.
But with Asian spot LNG prices LNG-AS down by half from a peak of more than $20 per million British thermal units (mmBtu) in early 2014, buyers have become restless and started demanding concessions.
In Japan, the world’s biggest buyer of LNG, utilities have said they are unhappy with the terms from sellers, including Qatar and Malaysia.
In India, seen as a hotspot for LNG demand growth, GAIL has re-negotiated some prices with Russia’s Gazprom, Kallanish Energy learns.
Singapore International Arbitration Center (SIAC) has been lobbying to become Asia’s key LNG arbitration center. Singapore is also trying to establish itself as Asia’s LNG spot market hub.
Woodmac’s Kavonic warned there were also risks for buyers. “Threats to renegotiate existing contracts now, outside of what is contractually permitted, will damage their (the buyers’) reputation for contract sanctity and impede their ability to underpin new supply projects when they need to in the future.”