JCC-indexed LNG contracts could lose US$15 billion value post IMO 2020
Wood Mackenzie’s latest report reveals that LNG sellers with contracts linked to JCC (Japan Crude Cocktail) could lose some US$15 billion in unearned revenues. This is a result of the IMO 2020 regulation limiting sulphur content of marine fuels to up to 0.5%, which directly affects the price of sour crudes such as those composing the JCC mix. The IMO 2020 kicks in on 1st January 2020.
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 per barrel 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. Close to 50% of LNG contracts globally 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.”
Seven out of 10 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.
“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,” Veras commented.
Many LNG buyers, however, will have much to cheer as the JCC-Brent differential means cheaper LNG. Japanese buyers stand to benefit the most, with up to US$8.3 billion worth of savings from JCC depreciation when the IMO 2020 regulation takes effect. South Korea’s national gas company KOGAS and Japan’s JERA top the list as the biggest savers with a combined US$6.1 billion saved.
Although many LNG sellers are losing value by selling LNG indexed to JCC, the introduction of the sulphur restrictions on marine fuels will drive an increasing number of vessel conversions to run on LNG instead of fuel oil. This will drive growth in the global LNG bunkering market.
Veras added: “We forecast that this new market will drive a 23% annual growth in LNG demand for marine bunkering, reaching 22 million tons per annum (mmtpa) by 2030. This represents about 11% of marine fuels globally by then, up from only 1.1% in 2019.”