The Korea Fair Trade Commission (KFTC) is examining the illegality of the destination clauses of LNG import contracts between South Korean gas companies and exporters such as Qatar. At present, the KFTC and LNG importers in South Korea are regarding the clauses as a kind of poison pill.
This controversy is basically because the global LNG market is a sellers’ market. Countries such as South Korea, Japan and China have no other option but to rely heavily on those in the Middle East and, as such, have to accept unreasonable conditions in many cases. The destination clauses are to prevent remaining imported LNG from being exported to third countries. Each of South Korea, Japan and China is claiming that the clauses are unfair.
The Japan Fair Trade Commission pointed out on June 28 this year that destination and profit sharing clauses limiting LNG resale by importers in FOB contracts for LNG trade may be in violation of the Japanese Antitrust Law and such clauses need to be removed from new contracts and those to be updated. This has to do with the fact that LNG-based power generation currently accounts for more than 40% of the total power generation of Japan after the Fukushima accident in 2011 and the above-mentioned clauses can threaten the energy security of the country under the circumstances.
The KFTC is planning to refer to the case of Japan in taking action with the South Korean government looking to increase the ratio of LNG-based power generation and reduce those of thermal and nuclear power generation.
Once the KFTC actually initiates an investigation, it can put pressure on LNG exporters. Earlier, the EU banned the implementation of destination clauses and imposed sanctions on member countries that violated the ban. In addition, the EU is imposing no sanctions on non-member countries engaged in LNG trade and utilizing the ban in negotiating for contract improvement. “Inclusion of unfair contract terms by exporters will become more and more difficult as the South Korean government is working on the matter and the South Korean, Japanese and Chinese LNG industries are seeking countermeasures at the same time,” said an industry expert.