'Dramatic effect': How Japan's legal spat impacts Curtis Island

AN ARMY of lawyers working for the Japanese government is going through LNG contracts worth more than $100 million to see if they can tear them up, an oil and gas expert has warned.

Deloitte Australia's Geoffrey Cann said Japan's powerful trade ministry may be in the process of launching a court challenge to contest certain LNG contract clauses as anti-competitive, which could have a "dramatic effect" on the gas plants on Curtis Island.

To get to the root of the problem Mr Cann said you would have to roll the clock back to 2011 when, after the Fukushima nuclear disaster, Japan "compensated" by turning off its nuclear fleets and decided to move to natural gas.

>>US$1.1Bill loss for Gladstone gas giant

LNG FUKUROKUJU is purpose built to carry LNG from the APLNG facility at Curtis Island to Kansai Electric facility in Japan.
LNG FUKUROKUJU is purpose built to carry LNG from the APLNG facility at Curtis Island to Kansai Electric facility in Japan. APLNG

Fast forward to now and, with global commitments to climate change, a shrinking population and a ramp-up of its nuclear fleet Japan has long-term contracts for gas it has no market for.

"Gladstone is not a big shipper of LNG to Japan, with its major markets in China, Korea and Taiwan, but if Japan tests the anti-competitive clauses it stands to reason big buyers of natural gas may go down the same route," Mr Cann said.

"Japan is in a difficult position and even if they're unsuccessful it wouldn't be too much of a stretch for other countries with a more political judiciary (such as China) to simply declare LNG contracts null and void.

"And with the price of oil in its longest slump ever, the timing could not be worse."

If Japan is successful in walking away from its contracts, Mr Cann said the price of LNG could be driven down further, which would hurt Curtis Island producers because they already operate with some of the highest costs of production in the world.

"Global LNG trade is based on the holy trinity of long-duration contracts, oil-indexed pricing and destination restrictions," Mr Cann said.

"Destination clauses prevent gas buyers from turning into gas sellers and competing with their source of supply for markets.

"(But) if contracts are deemed to be anti-competitive and buyers try to obtain rights to sell gas, it will mean there will be two sellers competing with each other to find a market for one cargo...and in order to clear the market one lever traders will use will be to drop the price of LNG."

Although Mr Cann said it was hard to understand why Japan's contracts would be anti-competitive, the European Union "carried out a similar exercise against Russian pipeline gas".

Mr Cann said LNG sellers and producers "should not fear" Japan's decision to rip up contracts in the short term and it may even be a "healthy step" towards a more liquid and transparent market.