BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Japan Diverting Excess LNG Signals Structural Changes In LNG Market

Following
This article is more than 8 years old.

Liquefied natural gas (LNG) markets have come full circle since the 2011 Fukushima nuclear disaster in Japan that caused the country to eventually shut down all of its nuclear reactors. To replace lost power generation due to the shut-down, Japan’s LNG procurement escalated at a record pace, driving up prices for LNG in the Asia-Pacific region to unprecedented levels.

For the next several years, LNG markets entered a period of somewhat limited supply but exorbitantly high prices that exceeded any logical supply/demand fundamentals. Consequently, top LNG importer Japan, and the world’s second largest LNG importer, South Korea, India and others scrambled to bring prices down by various schemes but to no avail.

However, what the world’s largest LNG importers couldn’t do, over production did for them. With global LNG production reaching 250 mmtpa last year and with forecasts for that production to reach 330 mmtpa by 2018, prices for the super-chilled fuel have spiraled downward. In February 2014, LNG spot prices in Asia breached the $20 per million British thermal units (MMBtu) mark; however, the Platts JKM for LNG cargoes delivered in March fell to $4.95/MMBtu Friday, with forecasts calling for prices to decline even more.

With the ongoing supply glut gathering even more steam and with the glut likely to persist well into the next decade, news broke on Thursday that Japanese LNG buyers will now sell unwanted LNG. Reuters said that after decades of negotiating with suppliers for the lowest possible prices, the world's top importer is moving from customer to competitor, seeking to sell surplus stock. The report added that Japan is unlikely to shift vast volumes off its books, but it is delaying or diverting some shipments after overestimating gas needs, adding pressure to a market already facing a global glut.

However, news that Japan is trying to get ride of gas is a remarkable development, one that signals not just a fundamental change in global LNG markets but also a structural change as well.

As more LNG enters the market from Australia which will have ten LNG projects on-stream by 2017 for a total liquefaction capacity of 85 mmtpa (accounting for over one-third of current global LNG demand), bypassing current leader Qatar which has 75 mmtpa of liquefaction capacity, and with at least five U.S.-based LNG projects under various staged of construction, the over supply scenario amid tepid demand will cause more LNG buyers to become sellers and traders.

Spot and short term deals will also represent more of a percentage of LNG contracts, much to the delight of Singapore whose aim is to become Asia’s regional LNG trading hub.  Also, LNG producers who in the past were virtually guaranteed sufficient demand for their projects will now have to go out and find demand in many cases.  Structural changes in LNG markets are afoot and similar news like the disclosure from Japan will become common place, its now a buyer's market, much to the chagrin of producers who for years called the shots.