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KOGAS in LNG arbitration with Australia's North West Shelf Gas

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LNG Industry,

Reuters are reporting that South Korea’s Korea Gas Corp has entered court-administered arbitration with Australian joint venture North West Shelf Gas seeking to settle a dispute over a LNG contract that expired in 2016.

KOGAS confirmed the arbitration process was under way but declined to give further details.

The case, to be heard in a specialist arbitration court, will be closely watched by the LNG industry: KOGAS is the world’s second-biggest single buyer of LNG, while Australia has ambitions to overtake Qatar as the world’s biggest exporter of the fuel.

The arbitration relates to a difference over an agreed price renegotiation during a mid-term supply contract.

Saul Kavonic of energy consultancy Wood Mackenzie it was “the first time in Asia” that an LNG buyer has resorted to taking an LNG price review negotiation to arbitration.

South Korea imports most of its LNG through KOGAS, the country’s sole LNG wholesaler. The firm brings in over 30 – 31 million tpy, 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 their more than US$20 per million British thermal units 2014 peak, 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.

There is precedent. Between 2008 and 2014, European utilities entered into dozens of arbitration cases, most winning awards in their favour and freeing up natural gas volumes to be bought and sold on spot trading hubs.

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