A spat brewing between Qatar, the world's No.1 producer of liquefied natural gas (LNGLF) (LNG), and its biggest customers in Japan underscores rising tensions between buyers and sellers of the super-chilled fuel as a supply glut unbalances the market.
Importers of LNG having been pushing for greater benefits amid the surplus, signing new, cheaper contracts that give them more flexible terms, while exporters try to preserve long-term supply deals written in their favour during tighter markets.
Worried some buyers are becoming too bold in their push for an advantage, Qatar Petroleum warned customers in Japan - by far the biggest LNG importer - not to press too hard in long-term supply talks, because it could result in Japanese companies being squeezed out of Qatari gas projects.
While suppliers have granted more flexible terms on some new contracts, many are worried buyers could seek arbitration to renegotiate contracts locking them into decades-long take-or-pay deals that don't factor in steep price falls, and which often bar importers from re-selling contracted cargoes.
"Parties (who import LNG) have intimated their frustration with such clauses," said Nandakumar Ponniya of law firm Baker & McKenzie.Wong & Leow, although adding that as yet there was no surge of attempts to force contract changes through arbitration.
Arbitration is a form of legal resolution outside formal courts in which both sides of a contractual dispute agree to be bound by the decision of a third party.
While Asia's top LNG buyers in Japan and South Korea - including JERA, a joint venture between Tokyo Electric and Chubu Electric, and Korea Gas Corp - are not saying so publicly, several sources familiar with the matter said there are high level internal talks over the possibility of arbitration.
"Virtually all major Asian LNG buyers would like to seek arbitration. They just don't want to be the first to do so, as this would likely create negative publicity," said one source who advises companies on such cases, speaking on condition of anonymity due to the sensitivity of the matter.
"It is safe to say that arbitration is being considered by most big Asian buyers," one Japanese utility source said.
Asia takes in some 70 percent of global LNG supply. But unlike in piped natural gas markets in North America and Europe, most of Asia's purchases are bound up in long-term contracts, with fixed volumes, caps on price fluctuations and clauses restricting the destination to a single port or buyer.
Should arbitration be successful, LNG buyers would likely be allowed to either re-sell excess but contracted cargoes into the spot market, or be able to adjust supplies more flexibly, forcing producers to sell more spot LNG.
A tide of new LNG, particularly from Australia and the United States, has pulled Asian spot prices <LNG-AS> down more than 70 percent since 2014 to around $5.50 per million British thermal units.
Like Qatar, other LNG producers on the losing end of the price falls have warned buyers about pursuing arbitration.
"For anybody to orchestrate an arbitration event would be so detrimental to their reputation in the market, that it would be much more expensive to do than to just sit out the contract and sign a better one (later)," said Maarten Wetselaar, director for gas and new energies at Royal Dutch Shell (RYDAF)
, the world's biggest listed LNG company.
Still, 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.
"It would be quite interesting to see whether and how the European script plays out in Asia," said Sriram Chakravarthi, Singapore Academy of Law's Chief Legal Counsel.
European sellers like Norway's Statoil (STO)
decided it was preferable to defend market share by offering more flexible contracts or sell directly into the spot market.
Others, like Russia's Gazprom, were forced under arbitration to offer better terms. Now, arbitration specialists are hoping for new business in Asia.
"We see Asian markets in a similar position as European gas markets at the beginning of the 2000s, and we believe that contractual disputes, including arbitration proceedings, will increase in Asia," said Madjid Kubler, an arbitration expert based in Berlin, Germany.
Past European arbitration cases took place in Paris, London and Stockholm. Singapore, already working to establish itself as Asia's trading and legal hub for the commodity sector, is lobbying heavily to be the region's key LNG arbitration centre.
"Besides being a hub for LNG ... Singapore is a regional base for many international legal firms specialising in energy and commodities," said Lee Ark Boon, the chief executive of IE Singapore, a government body promoting Singapore's trade.
The city-state's ambitions were boosted by commodity trader Trafigura, which in April launched a standard LNG master sales and purchase agreement (MSPA) that suggested dispute resolutions be referred to and resolved by the Singapore International Arbitration Centre.
(By Mark Tay; Additional reporting Vera Eckert, Osamu Tsukimori and Jane Chung; Editing by Henning Gloystein and Tom Hogue)