According to the report, this is a result of the IMO 2020 regulation, which commences on 1 January 2020, and limits sulfur content of marine fuels to up to 0.5%. This directly affects the price of sour crudes such as those composing the JCC mix.
The JCC is the weighted average price of a mix of crude oils imported by Japan, mostly composed of sour Dubai and Oman crudes. Between 2020 and 2030, Wood Mackenzie expects JCC to be, on average, US$1.20/bbl cheaper than Brent. This is a reverse of a trend observed prior to the IMO 2020 announcement in October 2016 when JCC was priced at a premium to Brent. According to Wood Mackenzie, nearly 50% of LNG contracts worldwide are indexed to the JCC.
Wood Mackenzie research analyst Otavio Veras said: “Besides value reduction due to equity ownership in LNG projects heavily contracted on JCC, portfolio players also lose revenue on contracts linked to depreciated JCC.”
According to Wood Mackenzie, seven out of ten of the most devalued LNG projects are Australian, with an aggregate US$7.6 billion in unearned revenues potentially lost from assets whose LNG volumes are contracted under JCC. Gorgon LNG, in particular, is the most affected project.
Veras added: “We expect LNG contract renegotiations to take into account the depreciation of JCC in relation to Brent, and sellers may try to push for higher JCC indexations slopes. However, this may be difficult to achieve in today’s oversupplied market. For new contracts, we see significantly less appetite for JCC-indexed contracts with Brent now much more favoured for buyers who want oil-indexed LNG.”
However, Wood Mackenzie claims many LNG buyers will have reason to celebrate as the JCC-Brent differential means cheaper LNG. Japanese buyers will benefit the most, with up to US$8.3 billion worth of savings from JCC depreciation when the IMO 2020 regulation takes effect. KOGAS and JERA are the biggest savers, with a combined US$6.1 billion saved.
Despite the fact numerous LNG sellers are losing value by selling LNG indexed to JCC, the introduction of the sulfur restrictions on marine fuels will drive an increasing number of vessel conversions to run on LNG instead of fuel oil. This will help lead to growth in the global LNG bunkering market.
Veras said: “We forecast that this new market will drive a 23% annual growth in LNG demand for marine bunkering, reaching 22 million tpy by 2030. This represents about 11% of marine fuels globally by then, up from only 1.1% in 2019.”
Read the article online at: https://www.lngindustry.com/liquid-natural-gas/21112019/wood-mackenzie-releases-new-report/