Japan is right to look for alternative pricing LNG mechanism to the oil-linked method it relies on now. (Microsoft)

Reasoning often plays a smaller role in our political and moral decision-making than most people popularly thought, according to psychologist Jonathan Haidt, author of The Righteous Mind. Instead of examining the first principles of a problem and reasoning logically to a conclusion, subconsciously people often jump to their preferred conclusion first and then work backwards to justify it.

Perhaps some version of this post-hoc reasoning process is infiltrating the LNG world as Japanese and South Korean buyers look for ways to reduce the long-term cost of their LNG imports.

The problem: Japan is paying between $16 and $18 per million Btu for its LNG and, with import volumes at an all-time high, this is not sustainable in the long term. The traditional mechanism of linking the price of LNG to oil, although effective in the past, is no longer effective, or appropriate, for pricing LNG on the Japanese market today.

The solution: Reduce LNG prices by introducing some sort of mechanism linking LNG prices to the United States Henry Hub (HH) prices, currently the lowest traded gas price in the world.

And it is this reasoning that may be slightly askew. While its conclusion – lower LNG prices – may satisfy Asian buyers today, the method – linking LNG prices to HH – may not produce such a satisfying conclusion tomorrow (or, more realistically, in five years’ time when the first US LNG plants come onstream, or in 10 or 15 years’ time when it’s anyone’s guess what the Japanese or HH gas price will be). Because, although the Japanese Crude Cocktail (JCC) may no longer be a relevant price indicator for the Japanese gas market, neither, really, is the US marker.

And, aside from not being a relevant price indictor, it may not even be the lowest one; the gas price in the US, as the last decade has shown, can fluctuate wildly. If, for some reason, the JCC price goes down and the HH goes up, US LNG exports will no longer seem cheap.

The solution? “Gas has got to become a grown-up commodity, and what grown-up commodities do is they have prices based on short-term movements of the market, and actually based on the fundamentals of their product, not based on the fundamentals of some other product,” according to Jonathan Stern, chairman of the natural gas research programme at the Oxford Institute for Energy Studies.

Asia needs to develop its own gas hub and quickly. If Japan does not do it now, China will. Stern thinks we could even see an Asian gas hub before the end of the decade: “It’s taken the best part of 10 years to happen in Europe, but what’s going to accelerate it in Asia is that the situation is urgent.”