Japan Drives Fledgling Asian LNG Spot Market
Last week the Xinhua News Agency reported that China launched its first spot market for natural gas on the Shanghai Petroleum Exchange on July 2 to cope with peak summer electricity use. However, China’s natural gas exchange is only seasonal and aims to more efficiently allocate natural gas resources and meet rising demand in the summer.
Contrary to China’s seasonal exchange is the Asian LNG spot market that is becoming a dominant force in the region. This market is being developed as producers, marketers, distributors and end-users try to determine what it will look like in the coming years.
Analysts often use the terms “spot” and “short-term” interchangeably, although some still differ on the true meaning of an LNG spot market. Yet most of the cargoes which are talked about as spot are often sold under short-term deals of up to two years’ duration, and medium-term contracts of two to 10 years.
LNG has traditionally been bought and sold using long-term contracts of up to 20 years, linked to the price of crude oil. Yet an abundant supply of gas in recent years (much of it from shale gas resources in the US) has encouraged the development of an Asian LNG spot market.
Consequently, the spot market now represents around 20% of the global LNG market. The total amount of LNG traded globally has reached 223.8 million tons per annum (mtpa) and, according to a paper published by Poten & Partners in March, short-term LNG traded volumes are projected to increase at an average rate of 11 percent per year up to 2015. This growth rate is higher than the total growth rate for the LNG market, which some analysts estimate will be 7 percent per year; therefore the proportion of short-term LNG trades is set to grow.
The primary factor driving the spot, or short-term LNG market in Asia is Japan. Recently, Japan shut down around 80 percent of its nuclear power capacity since the country’s earthquake and the subsequent Fukushima nuclear disaster last year. As a result, the country imported a record 83.2 mt of LNG in the financial year, which ended on March 31.
In May, Japan pushed Asian spot market gas prices to a high. Prices now however are backing off for several reasons, and one of them is nuclear.
On Thursday July 5, Kansai Electric Power Company announced it was set to generate electricity from its Ohi Nuclear Plant, ending a two-month period in which all 50 of the country’s reactors were offline. Concurrently, spot LNG, for delivery in four to eight weeks, to northeast Asia dropped 55 cents to $15.25 a million British thermal units last week, according to World Gas Intelligence. As a result, LNG prices in Asia may have already peaked after reaching three-year highs. Many experts say prices won’t rebound until later in the year.
And on early Monday July 9, Kansai Electric followed through with its plans. The AFP reported that the company’s Unit No. 3 [reactor] had come back to full capacity after the reactor was switched on earlier this month. It was the first restart since Japan shut down its nuclear stations last year. A Kansai Electric spokesman said that the utility plans to resume operations at another reactor in the same plant later this month.
However at this point Japan’s nuclear energy ambitions and the Japanese public’s appetite for more nuclear start-ups remain to be seen. Additionally, local governments remain opposed to nuclear power station restarts.
Though Japan’s natural gas demand drives the market, other players in the fledgling Asian spot market are South Korea, China and Singapore, with smaller players like Vietnam, Singapore, Thailand and the Philippines following behind.
South Korea however is mostly a price follower of LNG while China still fails to generate sufficient spot LNG demand to influence prices. The bulk of South Korean buying is done by state-owed Korea Gas (Kogas), which tends to target prices at a discount from Japanese traded prices according to an Argus Media analyst that wished to remain anonymous. Kogas has also shifted focus to securing term cargoes or short tem deals rather that spot cargoes.
In addition, market expectation is that Singapore’s role as a trading hub may change trade flows in the region. The Argus analyst pointed to the high storage capacity that the Singapore terminal offers and the lack of clear LNG requirements, which puts the country in a strong position as a spot player. Singapore also has the advantage of being surrounded by several new players and future importers such as Thailand, Indonesia, Malaysia and Vietnam. The terminal operator’s plan is to break-bulk large LNG shipments, offering smaller quantities to regional buyers with limited import capacity.
Another variable in the Asian LNG spot equation is logistical. Spot LNG is harder to put together because of the nature of gas transport and distance, as well as boil-off. Distance determines how much you sell at the end, though some try to reliquify the gas onboard, but if comparing long haul versus short-haul, with long haul you simply have less to sell.
Infrastructure is also a key factor in determining how the Asian LNG spot market unfolds. Some countries, particularly in Southeast Asia, lack LNG infrastructure and must have the means to regasify, possibly store and eventually sell LNG.
For example, the Philippines which is experiencing a surge in gas demand is planning to build its first LNG terminal and by the end of the year expects the release of its new natural gas master plan which calls for building pipeline infrastructure, a LNG hub that will include regasification and storage units, and as ancillary to the pipeline infrastructure.
In addition, Thailand, recently opened an LNG terminal, and is already talking about expanding its import capacity. In March a Thailand PTT executive said the on-stream date of a second LNG unit could be brought forward to 2014-2015, from 2016.
Vietnam, Singapore, Malaysia, Indonesia, Pakistan, Bangladesh and India are all working to develop terminals and new gas infrastructure as well.
Price is a determining factor as well in the Asian LNG spot market. Many Asian countries have government-controlled prices, which makes gas artificially low. As a result the disparity between the government-set price for gas sold domestically and international LNG prices is a problem.
Other factors coming into play include recent news that China has discovered massive amounts of shale gas reserves, though it appears reasonable to assume they will simply use those resources for domestic supply. Good news for the region’s gas supply is also coming from Down-Under. Australia is reported to have large shale gas deposits as well. The EIA estimates Australian shale gas reserves to be close to 400 Tcf.
On July 7 Kuick Research released a report titled “Shale Gas Development to Strengthen Australia LNG Export Market.” With the shale gas find, it is all set to overtake Qatar to become the largest LNG exporter in the future,” says the report. The report also added however that the Australian shale gas market is in its infancy and it will be some time before it can commence commercial production.