JCC-Indexed LNG Contracts May Lose $15bn Value Post IMO 2020: WoodMac
LNG sellers with contracts linked to JCC (Japan Crude Cocktail) could lose some $15bn in unearned revenues as a result of the IMO 2020 regulation limiting sulphur content of marine fuels to up to 0.5%, Wood Mackenzie said in a report published November 21.
The IMO 2020 regulation directly affects the price of sour crudes such as those composing the JCC mix, which is the weighted average price of a mix of crude oils imported by Japan, mostly composed of sour Dubai and Oman crudes, WoodMac said. The IMO 2020 kicks in on January 1, 2020.
Between 2020 and 2030, Wood Mackenzie expects JCC to be, on average, $1.20/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, WoodMac said. Close to 50% of LNG contracts globally are indexed to the JCC.
"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," WoodMac analyst Otavio Veras said.
Seven out of 10 of the most devalued LNG projects are Australian, with an aggregate $7.6bn in unearned revenues potentially lost from assets whose LNG volumes are contracted under JCC. Gorgon LNG, in particular, is the most affected project, according to WoodMac.
"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 benefit as the JCC-Brent differential means cheaper LNG. Japanese buyers stand to benefit the most, with up to $8.3bn worth of savings from JCC depreciation when the IMO 2020 regulation takes effect, WoodMac said. South Korea's national gas company Kogas and Japan's Jera top the list as the biggest savers with a combined $6.1bn 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. WoodMac believes this will drive growth in the global LNG bunkering market.
"We forecast that this new market will drive a 23% annual growth in LNG demand for marine bunkering, reaching 22mn mt/yr by 2030. This represents about 11% of marine fuels globally by then, up from only 1.1% in 2019," Veras added.