LNG sellers that link their prices to the Japan Crude Cocktail (JCC) could rack up as much as $15 billion in unearned revenues next year, following the introduction of new emissions standards for marine fuel, according to a new report from Wood Mackenzie.
In a statement dated November 21, the consultancy noted that JCC prices were calculated as the weighted average of several grades of sour crude imported into Japan. These grades are less desirable now, since IMO 2020, a policy instituted by the International Maritime Organization (IMO), will cap sulfur content in marine fuels at 0.5% as of January 1, 2020, it said.
As a result, JCC prices are set to fall once the new standards are in place – and they will bring JCC-indexed prices for LNG down along with them. This could lead buyers to favor contracts that link LNG prices to Brent crude instead of JCC, said Otavio Veras, a research analyst at Wood Mackenzie.
“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 ... For new contracts, we see significantly less appetite for JCC-indexed contracts with Brent now much more favored for buyers who want oil-indexed LNG,” Veras commented.