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Japan and EU to establish LNG framework

Consuming countries seek to create flexible market that can respond to sudden shortfalls

Japan and the EU will look to coordinate efforts to enhance the secure procurement of LNG.   © Reuters

TOKYO -- Japan and the EU are set to collaborate on developing a framework to promote the stable procurement of liquefied natural gas, in a bit to establish a more flexible market.

LNG purchases are typically made on long-term contracts, often extending over 20 years. However, the practice has led to rigidity in the market. The proposed framework would allow for greater flexibility and enable the gas to be allocated in cases of unexpected shortfalls. 

Japan's Minister of Economy, Trade and Industry Hiroshige Seko announced the plans at a conference on Monday in Nagoya, which brought together ministers and corporate executives from both producing and consuming countries.

The International Energy Agency will also take part in coordinating efforts to enhance the secure procurement of LNG, Seko said.

The goal is to develop a system through which to track the movement of LNG reserves among a group of participating countries, from cargo status to reserve levels at various plants, and allocate from the total stockpile accordingly when countries face emergencies such as natural disasters.

Such a network already exists within the EU, enabling the public and private sectors to supply the resource throughout the bloc via natural gas pipelines.

Tokyo envisions applying a similar system to the global LNG market, and will also consider partnering with South Korea, China and other consumers.

LNG contracts often forbid reselling of the resource without the seller's consent, with the aim of preventing price crashes. Japan and Europe will together push for the easing of destination clauses that ban buyers from selling the fuel on to third countries.

Experts from Japan and the EU intend to jointly develop model clauses and promote them to other buyers.

Increased development of shale gas in the U.S. is also leading consumer countries to push for a more flexible market. American LNG is often sold under spot contracts, in contrast to that produced in the Middle East and Australia. Such contracts do not contain the same destination restrictions.

The Japanese government also plans to allow companies that handle LNG exports to third countries to use various financial incentives. Tokyo aims to "create an LNG market of about 50 million tons (through these measures)," Seko said.

Tokyo Gas will start operating a new LNG shipping route in December and will establish a system enabling the resale of excess LNG to Europe.

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