Liquid market for LNG still looks some way off
Not all traditional LNG offtakers want to enter the spot market. This will hold back liquidity and commodisation of LNG
Certain traditional buyers are more concerned with energy security, and do not see as much value in promoting market liquidity
ONE long-time liquefied natural gas buyer has recently alluded to the resistance against the commodisation of the supercooled fuel and the associated shipping assets.
Jane Liao, chief executive of natural gas business at CPC Corp, told delegates at the Gas Summit 2019 that a trade-off persists even in a more liquid LNG marketplace today — buyers still need to choose between prioritising the reliability, affordability and security of supplies often associated with traditional offtake arrangements or liquidity, transparency and flexibility extended by spot and short-term trades.
This view takes into account the increasing volumes being traded on the spot market, one sign that LNG is evolving into a commodity.
This is made possible not least because liquidity has built up on excess or uncontracted new supplies, contractual terms have been relaxed to allow room for arbitrage and certain LNG price benchmarks having been made available to guide spot trades.
Ms Liao however, did not seem to buy into the idea that such conditions, which boost transparency and flexibility in global LNG trade, would facilitate a marketplace so desired by traditional LNG offtakers.
She argued that the exclusion of a destination clause in recent sales and purchase agreements — particularly those tied to exports from the US — disregarded the fact that this clause is meant to address “ship-shore compatibility” concerns.
She also openly challenged the viability of LNG buyers building trading portfolios and taking positions with both long-term offtake and spot trades.
Her counterpart in Japan, energy major Jera, holds a diametrically opposing view.
Hiroko Sato of Jera counter-argued that the Japanese entity now standing as the world’s largest singular LNG buyer can achieve the best of both worlds through cultivating a portfolio business.
He equated the flexibility from access to spot cargoes in a more liquid LNG market today with enhanced reliability in supply sources.
Back in 2016, Jera expressed its intent to slash the amount of LNG it procures through long-term offtake by 42%.
To put these arguments into perspective requires a consideration of the varying roles CPC and Jera Energy play in the liberalisation of Taiwan and Japan’s energy markets.
Jera, which is a joint venture between two Japanese utilities, Tokyo Electric Power and Chubu Electric Power, is obliged to prepare for the liberalisation of Japan’s electricity market.
As competition ramps up on the home turf, Jera needs to reinvent itself and go beyond just serving its national duty of ensuring energy security.
CPC on the other hand, is grappling with similar challenges, albeit in a slightly different context from a liberalising gas market back home. As the state oil and gas player however, CPC has historically been supplying gas to local utilities, not compete against them.
Taiwan and Japan rank along with South Korea as the traditional LNG importers so the developments in these markets also shape the evolving terms of LNG offtake arrangements.
What is interesting to note is that CPC and Jera still cover each other on LNG trades so their relationship is collaborative, not adversarial.
Still, Ms Liao’s comments are a stark reminder that liquidity in the LNG market may remain constrained in the near future so long as most traditional offtakers in Asia choose not to partake in spot trades.
Deregulating gas and utility markets will take time so these market participants may still hold significant sway over LNG demand.
And any lack of improving liquidity will not help bolster confidence in an Asian price benchmark — now perceived to be Platts JKM.
That also explains how certain LNG players have come to wonder out loud about the forces behind the recent collapse of a price spread between JKM and TTF, the benchmark for European trades, this winter.