The nascent Asian LNG spot market continues to develop as producers, marketers, distributors and end-users try to determine what it will look like in the coming years. Analysts and traders often use the terms “spot” and “short-term” interchangeably, although some still differ on the true meaning of an LNG spot market.
“Most of the cargoes which are talked about as spot are nothing of the sort,” Andy Flower, an independent LNG consultant, told Interfax. “They are sold under short-term deals of up to two years’ duration, and medium-term contracts of two to 10 years.”
Traditionally, LNG has been bought and sold using long-term contracts of up to 20 years, linked to the price of crude oil. But an abundant supply of gas in recent years – much of it from shale gas resources in the United States – has encouraged the development of an Asian LNG spot market.
As a result, 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 recent paper published by Poten and Partners, short-term LNG traded volumes are projected to increase at an average rate of 11% 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% per year – therefore the proportion of short-term LNG trades is set to grow.
Japan drives the market
The primary factor driving the spot, or short-term, LNG market in Asia is Japan.
Since the earthquake last year and the subsequent Fukushima nuclear disaster, the country has shut down around 80% of its nuclear power capacity. As a result, the country imported a record 83.2 mt of LNG in the financial year which ended on 31 March.
“LNG prices have increased by almost 33% since the Fukushima disaster that forced countries to take another look at their nuclear energy installations. Global demand has increased by 9% in the first five months of 2012, and I expect prices to rise even further throughout the rest of the year as supply and demand continues to widen in the non-US markets,” Chris Faulkner, chief executive of Dallas-based Breitling Oil, told Interfax.
Al Troner, an analyst at the Houston-based Asia Pacific Energy Consulting, also sees Japan as integral to setting the price of LNG in Asia, as well as the possible export of American shale gas to the continent.
“US shale gas sent to Asia Pacific as LNG is based on Henry Hub pricing, gas-on-gas,” he told Interfax. “As a result of the energy supply from shale gas production, we expect Henry Hub prices to be depressed for at least this decade – perhaps $2-3 or $2.50-3.50 per million Btu (MMBtu), a quarter or a third of Asian LNG prices.”
Troner pointed out, however, that Asian LNG prices are based on the Japanese Crude Cocktail, which has grown relatively high as oil and gas prices have diverged.
Another variable in the LNG spot, or short-term, market equation is logistical, he added. “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 long-haul versus short-haul, with long-haul you have less to sell.”
Ways and means
“Ways and means,” as Troner called it, also comes into play – the infrastructure to regasify, possibly store and eventually sell the LNG. “There has to be a gas system behind the LNG terminal, even if it is only a power plant taking all the gas.”
This kind of infrastructure is what several Asian countries are racing to develop. The Philippines, which is experiencing a surge in gas demand, is planning to build its first LNG receiving terminal.
Vietnam, Singapore, Malaysia, Indonesia, Pakistan, Bangladesh and India are all working to develop their own as well. Thailand, which last year became the first southeast Asian country to open an LNG terminal, is already talking about expanding its import capacity.
However, government-controlled prices in most southeast Asian countries, usually set artificially low, remain another significant factor in the creation of an LNG spot market. “Some governments subsidise local consumption, which stimulates demand for gas and inhibits local exploration with a potentially negative influence on trade balances and carbon emissions,” Faulkner said.
One major step, he said, would be to move from subsidised domestic pricing to a system based on the market value of gas. “Though importing governments may have limited ability to influence the pricing terms of long-term contracts, they need to be sensitive to policy moves that would make their buyers more competitive.”
Troner agreed that the disparity between the government-set price for gas sold domestically and the international LNG prices was a problem. “That means you have to be exempt from internal market controls, or buy your LNG on the cheap.”
However, analysts varied on the role they believe the LNG spot or short-term market will have in Asia in the future. Some see it developing, while others see it stagnating over time.
“Spot and short-term have a role to play, but buyers in Asia want security of supply and sellers, especially those who are building new projects and need security of demand, and that is achieved through long-term contracts, so spot or short-term will not overtake long-term,” said Flower.
He pointed to the fact that all of the projects now under construction in the Pacific Basin are underpinned by long-term contracts for 80% to 90% of their production. When they come onstream from late 2014 to 2017, there will probably be a decline in the share of short-term, he added.
“Moreover, sellers such as the Qataris, who have been supplying significant volumes of short-term, are terming-up sales so that will also reduce the amount of short-term.”