Setting an Asian LNG Market Price – the Search for a Local Solution

Author:Mr Peter Zaman, Marcus Dodds, James Scott, Simon Jones and Kohe Hasan
Profession:Reed Smith (Worldwide)
 
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This short note is to introduce two detailed papers that discuss the justification for the development of an Asian LNG reference price that is not benchmarked against the current 'Japanese Crude Cocktail' and suggests an approach to how that might be achieved. A short summary of the two papers is provided below.

As the market stands today, U.S. LNG prices tend to be set by reference to the price of natural gas at the Henry Hub, European LNG prices are usually set by reference to the price of natural gas at either the National Balancing Point in the UK or the Title Transfer Facility in the Netherlands and Asian LNG prices are typically set by reference to the price of the Japan Customs-cleared Crude (known as the 'Japanese Crude Cocktail' or JCC). There are historic reasons for Asian LNG to be benchmarked against Japanese oil prices but these reasons no longer apply today. The question is, what alternative is there to enable the long-term purchase of LNG to be done on the basis of an effective and liquid index other than the JCC?

There are currently a number of measures of the Asian LNG spot price which could form the foundation for a forward reference price. The most well-known are the following indices published by various price reporting agencies (PRAs): (i) the Japan Korea Marker (JKM); (ii) the Argus Northeast Asia index; (iii) the Singapore SLInG (SLInG); and (iv) the RIM DES Japan LNG Assessment. It is estimated that currently 40 per cent of spot and short-term LNG contracts are priced off the JKM, as published daily by S&P Global Platts. However, these indices lack liquidity and/or are considered not very transparent.

Many academic studies have considered the question of how an alternative to the JCC can be established for Asian markets, with most supporting the idea of the development of a liquid natural gas hub in locations such as Japan, South Korea, China or Singapore and the creation of an index based on that demand. There is consensus that there is a long way to go in each of the key LNG importing countries before a natural gas trading hub that has all of the necessary institutional and structural requirements in place for a hub, could operate. As such, an index based on a natural gas trading hub is five years away at the very least and may even be ten years away. Even if a natural gas trading hub can be developed in Japan, China, South Korea or Singapore, should the local price automatically equate to a price for the rest of...

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