Saturday, July 5, 2014

Japan LNG spot market prices drop like a rock

Nikkei reported this morning, July 5, that LNG spot market prices have fallen rapidly over the past 3 months and are now lower than any time since 2011 before the Fukushima accident, around US$11 per MMBTU, down 40% from their peak in February.

Why the drop?  First, LNG inventories of the Japanese utilities and of KOGAS (Korea's public gas utility) are now at high levels, with Japanese utilities inventories 13% higher than last year at 2.44 million metric tonnes.  Second, gas demand in Japan this March-May was lower than last year, supposedly reflecting warmer than usual late winter/early spring weather, and the start up of a large new TEPCO coal-fired plant.

But most important, the first "train" of a new LNG source came online in Papua New Guinea in May, a few months earlier than expected.  The new LNG infrastructure was developed with Exxon Mobil in the lead (and Japanese participation, of course) at a cost of US$19 billion.  Eventually, it will more than double the GDP (and export volume) of Papua New Guinea.  There are apparently has spot cargoes available, at least for now.

How much does this lower gas price help Japan?  Not a lot yet.  Currently 80% of Japanese LNG is imported under 10-20 year long term contracts priced off of middle Eastern crude oil.  Gas under those contracts is at around $15-16 per MMBTU, only down slightly from its peak.

But over the medium term, this can be a huge positive. Almost no Japan LNG imports were done via spot or shorter-term purchases prior to the Fukushima accident, and the fact that 20% of purchases are now under short-term contracts (defined as less than 4 years) is helping to develop a market.  The existence of functional, deep and broad wholesale markets is an essential step to creating competition in not only the gas and LNG business but also downstream electricity generation in Japan.

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