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Last Updated: June 25, 2016
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Gas & LNG
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The idea is to establish a full network of storage and pipeline infrastructure – possibly around Tokyo Bay – with full third-party access and transparency by 2025, the first LNG trading hub in the world.

That’s the idea, anyway, as Japan flexes its muscle as the largest consumer of liquefied natural gas (LNG) in a bid to move the LNG market in Asia forward. The end goal is to establish Japan as the centre of Asian trade, creating a Japan benchmark price as a reference for the rest of continent; but for now, the current LNG supply glut is enabling Japan to take some bold steps forward today.

Japan’s hunger for LNG has driven much of the market over the past two decades, establishing long-term contracts locked in over decades at premium prices over the rest of the world, creating the so-called Asian premium for LNG. Japan was largely happy to pay this, but the contracts also locked in long-term price tags – requiring rates of, say, US$12-16 mmBtu for a 20-year Qatar LNG contract. Meanwhile, in the spot market, new gas from Australia and US shale has driven Asian spot prices down to US$4 mmBtu. That’s a huge gap and Japan is not happy about it.

It has clout. As the largest LNG importer for the foreseeable future, Japan can (and has) demanded revisions to contracts, beyond just lower prices. Also on the chopping block are clauses restricting shipments to specific ports, resale of shipments and removing the long-standing tradition of pegging LNG to crude prices. It also wants to move away for multi-decade contracts to shorter ones linked to spot LNG prices. All these little moves are setting the stage for an eventual Japan LNG hub – freeing up the market away from a restrictive, opaque one to being more transparent and dynamic. Japan’s moves have also emboldened other Asian LNG buyers – China, India and South Korea have all renegotiate long-term supply contracts recently.

The option to re-sell is particularly important, as it underpins the entire idea of a trading hub. In May, Tokyo Electric Power and Chubu Electric Power’s joint venture Jera Co inked a deal to re-sell up to 1.5 million metric tons of LNG to France’s Electricite de France for a period of 30 months beginning June 2018 at (cheaper) European prices. Instead of merely absorbing surplus fuel as required by their long-term contracts, the deal allows the two Japanese buyers to become sellers (albeit at a loss). It is the first such deal for a Japanese buyer, and there is more to come according to Jera.  

Sellers, particularly in the Middle East, aren’t happy, but the current supply glut has switched the power dynamics to side of the buyers. With the gas flood expected to continue for three to four years, Japan has a small window to fundamentally shift the market now, before the supply/demand dynamics change again. And it is taking full advantage of that opportunity.

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