The June 21st announcement by the European Commission, heralding a probe into Qatar’s LNG supply agreements with European importers, does not touch upon oil indexation, placing the emphasis on the LTCs’ destination clauses. Of course, this issue, too, could be dealt with by seeking from Qatar Petroleum the introduction of competitive benchmarks into its price review clauses in contracts with consumers within the EEA, as has already happened with Gazprom in its own antitrust case with Brussels regarding the CEE. In the meantime, with oil indexation out of the table (as was also confirmed by press reports), a plausible reading of EC’s intentions is that the investigation will most probably look into destination clauses and restrictions on diversion applying to FOB sales, even though it is yet to be seen if DES contracts are equally going to be affected.
Leaving the pricing issue out of the scope of the inquiry does not essentially influence QP’s traditional model for shipping under oil-indexed LTCs. However, if one comes to think of the recent lifting of the North Field moratorium, Qatar will be able to significantly boost its export volumes at a level of 20.7BCM/a after five to seven years’ time, even though the re-imposition of US nuclear-related sanctions against Iran may discourage upcoming LNG expansion FIDs. Such an increase will inevitably lead the country to follow the wave of greater flexibility and lock in more spot-term contracts not only with Europe but with Asian markets, as well, where demand has increased in the post-Fukushima era, and where it has to face stiff competition from producers like US and Australia. It’s basically the need for more market liquidity that will, at some point, dictate the alteration of QP’s business model, and not so much EC’s initiatives.
Territorial restriction clauses have historically constituted an integral part of long-term LNG supply contracts. The particular provisions are, nevertheless, incompatible with the antitrust regulation of the EU, as they are believed to hinder the development of a competitive internal energy market and undermine free trade within the EEA. Japan is another major LNG importer that decided to follow Europe’s example in 2017 by concluding, through its Fair-Trade Commission, that destination restrictions violate its anti-monopoly act, as they prevent buyers from reselling the surplus of LNG they receive. An MoU with EC followed soon after, enabling the two consumers to join forces in favor of a more flexible and price-transparent market. But still, the whole contract renegotiation process in Japan has, up until now, moved at a rather slow pace, a fact which could prove problematic in the longer term.
In view of the US shale boom, it is highly likely that we will witness a gradual abolishment of destination clauses in the global LNG trade. For instance, Qatar, who for the moment outweighs competitors in terms of export distribution thanks to its low-cost LNG base, and despite the year-long Saudi embargo, is already involved in a mix of LTCs and more flexible supply contracts, as part of its international investment strategy. Now the question that consequently arises is, can we switch to 100% destination flexibility? Well, this is certainly not a one-way process and it will be determined by factors such as the degree of spot/short term market liquidity, the perspectives on the evolution of Asian trading hubs with reliable associated pricing benchmark and, needless to say, the range of LNG prices, and whether or not it will remain competitive.
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