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Japan opens maiden LNG trading hub JOE

Japan's first exchange for liquefied natural gas (LNG) has opened for business as it seeks to break a rigid price-setting system that has driven up its energy import bill in the wake of the Fukushima nuclear disaster

Big LNG buyers, such as Tokyo Gas and Mitsubishi Corporation, will be able to trade non-deliverable forwards - a type of futures contract without any physical settlement - on the new platform called Japan OTC Exchange (JOE), instead of nailing private, bilateral deals. Seventeen domestic and foreign companies are involved, including major power and gas providers, as well as trading houses. 

JOE, a joint venture between the Tokyo Commodity Exchange and Singapore-based energy broker Ginga Petroleum, hopes that prices set there will eventually become the benchmark for Asia. The trading hub has indirect support from Meti, the government ministry in charge of Japan's energy policy. 

By creating its own price market, Japan aims to put pressure on traditional suppliers such as Qatar and Malaysia, which have largely thwarted attempts to inject more flexibility into the market that could help lower prices for buyers.

LNG trading in Japan, the world's biggest importer of LNG, and other parts of Asia, is dominated by long-term legacy contracts linked to oil prices with bans on reselling. Such old trading practices coupled with lofty crude prices in recent years have been blamed for Japan's soaring energy costs. In time, a more exact measure of short-term supply and demand could help lower gas prices in Japan.

Japan's LNG spot import price averages $15-16 per million British thermal units (Btu), much higher than the price paid for gas in the US and Europe, where the super-cooled fuel is tied to the price of natural gas piped through networks. The average price paid for natural gas in Europe last year was $10.63/m Btu, while in the US prices ranged from $3-4/m Btu. "This new benchmark can give a kind of bargaining power," Kosuke Araki, managing director at JOE told the Financial Times. "We're aware that there could also be situations where the market price is higher, but as far as contracts are referring to actual LNG spot prices, there will be little room for argument."

Including the cost of liquefaction, transportation and regasification, Japan should really be paying about $11 or $12/m Btu for its gas rather than the average $16.39/m Btu it has paid over the past three years, said Hiroshi Hashimoto, a senior analyst at the Institute for Energy Economics, a state-backed think-tank. "The current gap between regions is not reasonable," he told the newspaper.

Japanese utilities are under pressure to slash fuel spending as the country imports more LNG for power generation after all its 48 operational nuclear plants have been idled for safety inspections over the past year. Japanese utilities, including Tokyo Gas, Japan's third-biggest buyer of LNG, plan to start trading the fuel to boost flexibility in shipments and cut import costs.

The option to resell LNG to customers in Asia and Europe will allow Japanese utilities like Tokyo Gas to commit to buying larger volumes, favoring them in price negotiations, the company said earlier this year.

With increased sources of LNG supply, it's becoming easier for buyers to agree flexible terms with sellers, such as Australia. These new terms include contracts without destination clauses that restrict the resale of cargoes.

In Australia, a slew of LNG projects under development will see the nation overtake Qatar as the world's largest exporter. Tri-Zen, a consultancy, estimates that about 11m tonnes of new Australian production under development is yet to be contracted, which means it could be sold into the spot market or on in short-term deals.

LNG exports from emerging suppliers in North America, Africa and elsewhere will not have strict restrictions on reselling too, so market liquidity will increase later this decade. But Japan is not the only nation hoping to become the centre of LNG trading in Asia, where LNG demand is forecast to soar. Singapore is busy creating a physical trading hub and plans to expand its capacity, while China began spot trades on a trial basis late last year. 

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