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Asian LNG price-index gains traction

Traders are in favour of liquefied natural gas (LNG) price assessments for Asian spot trading, according to energy broker Tullett Prebon, and moving away from prices linked to oil

Asia has no liquid natural gas markets to price spot LNG. And although most countries have signed long-term contracts linked to oil, traders want a price index that better reflects the cost of LNG to sell spot cargoes.

Leading the way is Platts' Japan Korea Marker (JKM), a daily assessment of LNG delivered to Japan and South Korea as a proxy for all Asian prices. Based on the JKM price, CitiBank executed the first LNG swap with an international oil major earlier this year. A swap facility allows commodity traders to offset some of the risk from market price movements.

“There’s at least one cargo a month being sold on JKM indexation,” Tullett Prebon LNG manager Melissa Lindsay told the LNG Global Congress. “The Peruvian government has been one of the leaders in this field, because, for cargoes landing in Asia, it’s most comfortable using some indexation to JKM.”

She added that 10 companies have bought, sold, or traded swaps against the JKM index. Most of the interest was for the first few months, but there are some enquiries up to summer next year. She is also seeing enquiries that used JKM as a reference point, although they were not trading on it, and estimated up to another 20 companies are undergoing internal processes to allow them to trade against JKM.

“Everyone is waiting for everyone else. Once it starts, it could take off quite quickly,” Lindsay said, as reaching a critical mass would provide the liquidity needed to attract even more players. 

Price flaw?

But rival energy-price provider ICIS Heren questioned the accuracy of the JKM, because a single price is produced from at least four different markets. “You can’t assess those four different markets, which tend to work on different demand fundamentals,” said Louise Boddy, head of gas, power, carbon and coal at ICIS Heren.

She pointed out that although Japanese and South Korean LNG prices had converged, there has been a gap of up to $2/million British thermal units (Btu) in the past and prices may diverge again in the future.

Instead of a single price for Asia, ICIS Heren assesses prices separately for Japan, South Korea, China, and Taiwan. “We looked at this index [JKM] and we’ve come to the conclusion that it’s flawed,” Boddy said. ICIS Heren also publishes deal information, she added, providing more transparency.

A third energy-data publisher, Argus Media, also provides LNG pricing assessments, with a price for northeast Asia and one for China.

Grouping the region

But despite Boddy’s reservations, Tullett Prebon’s Lindsay said that, for now, traders are treating Asia as a single market. “From a sellers’ perspective, they’re grouping that region within a few cents of each other. When we get to the finer details, they might try to get a $0.10-0.20 discount if the cargo is going to China [instead of Japan],” she said. Lindsay added that factors such as higher Korean port costs could partly offset the longer journey to Japan, and that traders could sell at a premium or discount to JKM according to how they saw the deal compared to the perceived norm.

With Japan’s nuclear power capacity knocked out by the earthquake and tsunami in March, the country is expected to import record amounts of LNG to make up for reactor outages. Prices next year could double to over $20/million Btu compared with pre-quake levels, with additional LNG imports possibly up by a third in a worst-case prediction, making the whole region very attractive for selling spot cargoes.

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