IEEJ：September 2016ｃ○ IEEJ 2016

Special Bulletin
A Japanese Perspective on the International Energy Landscape (287)September 2, 2016

Discussions in Singapore on Asian LNG Market Challenges
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
On August 30 and 31, the Energy Studies Institute of the National University of Singapore
hosted an international workshop in Singapore on the Asian natural gas/LNG market. Under thetheme “Gas Market Transition in ASEAN and East Asia: The Role of Market Liberalization andIntegration,” the workshop comprised three closed sessions and one open session. Some 40 peoplefrom Europe, the Americas and Asia, including energy industry officials, experts and internationalorganization representatives, participated in the closed sessions for vigorous discussions. Thefollowing summarizes points that were impressive for me at the workshop:
The workshop, though touching on global natural gas and LNG market problems, focusedon Asian market issues as indicated by the theme. A presumption for discussions was that oversupply
and the buyer’s market will remain for the immediate future (until around 2020 ). Whether naturalgas/LNG supply is excessive or not is no longer subject to discussions. At issue is how excessive
supply is or how long supply will remain excessive. Asian natural gas/LNG prices have alreadyplunged so that the Asian premium problem, far higher natural gas/LNG prices in Asia than in otherregions, has almost been resolved. However, participants in the workshop indicated interests in a
less-than-expected natural gas/LNG demand expansion in Asia even after the substantial pricedecline.
Great expectations are placed on natural gas as a clean fossil fuel that features richresources, great supply potential, energy diversification opportunities and supply stability. Naturalgas was once expected to enter a golden age where gas would meet the expectations and play a greatrole in the energy mix. Actually, the expectation has failed to be realized at least in Asia. Workshop
participants discussed why the golden age of gas has failed to come in Japan, China, India, SouthKorea, ASEAN members and other Asian countries. They pointed out that the presence of coal withstrong price competitiveness, fast-expanding renewable energy under policy support, LPG and otherpetroleum products with improved competitiveness through price plunges, Japan’s restart of nuclear
power reactors and the construction of new nuclear plants in China and other countries have createdvarious uncertainties for the future course of natural gas/LNG demand. These uncertainties haveresulted in the impacts not only on the demand expansion but also on fluctuation in demand, which
encouraged the buyers to seek for enhanced flexibility in supply. Particularly, workshop participants
noted that the development of the Asian natural gas/LNG market would depend on how LNG wouldbecome more competitive in prices, supply flexibility and supply security.
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Regarding the future and development of the Asian natural gas/LNG market, workshop
participants discussed the market size problem and structural market changes including the trading
hub development as key topics. Singapore, where the workshop took place, has steadily developed
relevant infrastructure, including LNG receiving terminals, and taken initiatives to develop a trading
hub for Southeast Asia. Even under the constraint of limited LNG transaction volume in SoutheastAsia, countries such as Thailand, Malaysia and Indonesia have begun to import LNG, contributing toinvigorating LNG trade. Singapore can exploit its position as the first mover in the trading hubdevelopment. Given that China’s Shanghai imports LNG and has an option to supply domestic
natural gas and imported LNG via pipelines, Shanghai may be able to take advantage of various
supply sources for developing the trading hub. Workshop participants also indicated their greatinterests in how Japan would form an LNG trading hub after the Ministry of Economy, Trade andIndustry in May announced an LNG market strategy calling for developing the trading hub in Japan.
In a sense, it is natural for natural gas/LNG market players in the world as well as theparticipants in the workshop to pay attention to Japan as the world’s largest LNG market. TheJapanese LNG market features not only the world’s largest size but also uncertainties caused by theuncertain future restart of nuclear reactors, competition from coal, growing renewable energy power
generation, progress in electricity and gas market liberalization and intensifying competition in themarkets. This is the reason for Japan to attract global attention. It is pointed out that European andU.S. cases and lessons indicate electricity and gas market deregulation as a major factor behind hubdevelopment and highly liquid transactions at hubs. In this sense, Japan’s ongoing market
liberalization has prompted LNG stakeholders in the world to grow conscious of the Japanesemarket.
Some participants in the workshop argued that government roles and policy support would
be significant for gas trading hub development in Singapore and China as well as Japan. However,others noted that actual market players’ actions would be finally and decisively important.
Impressively, they noted whether a trading hub could be developed successfully would depend on
what market players want to do. In this sense, Japanese LNG market players’ future actions, inaddition to the LNG market strategy provided by the government, would determine the future courseof the Asian LNG market. Many participants in the workshop vowed to closely watch and monitor
Japanese trends and follow market developments and achievements in Japan.
As a matter of course, Japanese and other Asian market players’ various efforts andinitiative are influenced by changes in market fundamentals. We should pay attention to internationaloil market and price trends as well as the abovementioned current LNG market trend including
oversupply and price plunges. Oil-indexed LNG prices under long-term contracts are susceptible tooil price changes and can deviate from spot LNG prices reflecting the LNG supply-demandrelationship. The deviation could result in a new phase for pricing negotiations between LNG buyers
and sellers. Oil price fluctuations also influence the relative competitiveness of U.S. LNG thatadopts a different pricing mechanism (based on Henry Hub prices). Amid various future market
changes, we will have to closely watch strategies and specific responses of Asian LNG market
players in a changing market fundamentals.
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IEEJ：September 2016ｃ
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