Hurdles face putative Asia-Pacific LNG hubs
Singapore, Shanghai and Japan all wish to become trading hubs and price-reporting agencies are trying to establish benchmarks
Since 2010, Asia-Pacific, historically the world's dominant liquefied natural gas-buying region, has increased its share of the market by 10 percentage points—it now accounts for 70% of global imports. Yet despite this hulking market position, the region lags well behind the US and Europe in developing tradeable indices that would allow market players to hedge price exposure and increase liquidity. This may be changing.
Recent increases in short-term contracting and gas-to-gas price competition have encouraged many to believe that the region, which includes the world's four largest buyers of LNG (Japan, China, South Korea, and Taiwan), may be on the verge of developing local mechanisms that reduce the degree of oil-indexed pricing in the market. Industry participants themselves, though, aren't so sure—and doubt that any Asian index or hub will attain critical mass to allow for broad-based gas-to-gas contracting in the near future.
Price reporting agencies report increased interest in the use of indices to price LNG in Asia-Pacific. S&P Global Platts claims swap volumes linked to its Japan Korea Marker (JKM) price index quadrupled in 2017 from 2016, to 50,266 lots, equivalent to "168 cargos traded on the paper market, versus 42 cargos the previous year", it said. But the JKM's nearly 95% forward correlation to the UK's National Balancing Point (NPB) gas contract suggests that the more liquid, though physically smaller, EU gas markets still drive much Asia-Pacific pricing. LNG-trading sources report that approximately 25% of Asian LNG not priced on oil is linked to the NBP, the EU Title Transfer Facility, or US Henry Hub prices. The region's churn ratio—the amount of times a given molecule is traded—is estimated at about one, compared with 60-90 in the US and 22 in the UK.
Platts' JKM is the principal index affecting Asia-Pacific LNG. Other regional indices published by price-reporting agencies, including Icis/Heren's East Asian Index, the Japan Monthly Spot index tallied by Japan's Ministry of Economy, Trade and Industry (Meti), Argus Media's Anea, and Rim Intelligence, don't appear to influence LNG trade. But Singapore's Sling spot LNG index, compiled by its electricity market operator Energy Market Company and Singapore Exchange Limited, has attracted interest, though little trade in the futures contract based on the index. UK-based Broker Tullett Prebon cooperates in producing the Sling DKI (Dubai, Kuwait and India) index.
While price indices develop, the market is considering where a physical LNG-trading-hub may emerge. China's Shanghai, Japan, and Singapore are all candidates. Based on US and EU market experience, many believe Singapore is the early front-runner for both financial and physical LNG trading. Singapore has a "general good feeling" about it, says an LNG analyst with a major oil company. Another adds that the island nation's history as an oil entrepôt with an existing oil and financial community; operating electricity and gas market; and available storage all suggest that if an Asia-Pacific LNG hub develops, it'll be there.
Japan and China have set out their stalls for LNG trading, but neither country has yet put in place the real prerequisites for a viable gas market, traders say. Leading Japanese buyers "are very keen because they want more rights as a buyer to get [gas] more flexibly. They like the idea of a hub", says one industry participant. But, she points out, "there's no gas market behind it", as the Japanese domestic gas market lacks liquidity in the absence of a national transmission system or alternative mechanism for trading gas within Japan. Meti has suggested various approaches to improve Japan's downstream market but participants are looking for more encouragement.
China's market, with its own gas production, as well as pipeline connections to other Asian suppliers and Russia, and LNG imports on the coast, would appear to have most of the infrastructure elements necessary for a successful market centred on Shanghai. But China's continued domestic gas-price controls will impede liquid-market activity. The concentration of gas supply on the heating and industrial market, to the exclusion of power generation in coal-producing areas, also suggests a more gradual market expansion, reckons the US Energy Information Administration. In both Japan and China, regulation needs to evolve, traders say.
Slowly does it
Developing new gas hubs takes time. The US and UK took a decade of regulatory encouragement of market practices in markets that already benefitted from highly developed transmission and distribution infrastructure and a plurality of independent market participants. The EU took nearly 20 years to overcome incumbents' hostility to gas and electricity market competition.
Asia-Pacific markets have only just started down the liberalisation path. "You have to unbundle the transmission or it won't work, and that takes away certainty from the utilities", bringing unpredictable financial consequences, says a senior gas analyst at a major oil company. But most market participants agree that the upcoming expiration of many long-term LNG contracts, just as large new volumes of the fuel enter the market from the US and later Qatar, may kick-start more spot trading.
A sign international trading companies see the LNG market opening up is their willingness to expand their LNG business to longer-term commitments. Leading trader Trafigura began 2018 by signing a 15-year LNG-supply agreement with Cheniere Energy of the US, after committing to additional investment in its Pakistan LNG floating storage and regasification unit. Gunvor, another leading trader, last year agreed a term exchange of delivered LNG to India's Gail in exchange for access to US FOB volumes.
Despite the rising interest in LNG hubs, some in the market remain sceptical about their value at this stage of the market's development. They note that fears of a glut of LNG in 2017 were wide of the mark. From a supplier like Qatar's point of view, "LNG hubs seem irrelevant for the region, given its size, space, and rapidly rising demand", says an industry official in the Gulf.
This article is part of a report series on Global LNG hubs