1. LNG's rigid LNG consumers in East Asia, such as Japan, Korea and Taiwan have sustained the rapid growth of contract terms: a dilemma for Asian global LNG trade since the 1970s. One of the major elements for this steep growth has been the LNG buyers fact that the LNG buyers in these countries, being power and gas utilities, have been blue-chip or state-run enterprises with extremely high levels of credibility, and that sponsoring consortia including the international oil majors have been able to procure capital thanks to the take-or-pay guarantees provided by these "bankable" companies.

The LNG business is a specialized process industry handling a unique product with temperatures down to minus 162 degree Celsius and immense investment requirements on the sides of both seller and buyer for liquefaction plants, tankers and receiving and storage facilities. As a result, early LNG projects were by necessity based on negotiations between individual sellers and buyers.

Consequently, in its early years the LNG business developed based on relatively rigid "point-topoint" trade where distribution channels were limited with no resale possibilities. Also, in general LNG business requires a longer period than crude oil to recover the massive investments required.

For these reasons, the provision of rigid transaction guarantees was indispensable for mitigating the risk of the LNG sponsoring firms and lenders. The take-or-pay obligation that covers a considerable volume under long-term contracts exemplifies such guarantees and, under such guarantees, the LNG sponsoring firms have acquired financing and realized their projects.

Since the beginning of the 1990s, as Japan, Korea and Taiwan each embarked on programs of liberalization in the energy sector and as Korea and Taiwan developed the privatization and BLOCK 3 - - FORUM 17 193

CHALLENGES FACING ASIAN LNG MARKETS: A BUYER'S PERSPECTIVE

segmentation of enterprises, medium- and long-term outlooks for power and gas demand have grown increasingly uncertain.

These uncertainties, as well as the sharp decline in economic growth rates of these counties, have brought uncertainty to the traditional foundation for LNG projects, namely the firm demand for LNG that had historically supported the fast-paced expansion of the LNG business. As they face fierce competition and their markets no longer continue to grow from strength to strength, the electric power and gas companies in these countries are beginning to realize that the take-or-pay clause which they used to accept as quid pro quo for stable supply could, on the contrary, amount to a high-risk contract term in the new business environment. They therefore have become reluctant to guarantee inflexible LNG off-take commitments spanning over 15 to 30 years and have become increasingly resistant to accommodating traditionally rigid t

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