IEEJ：July 2015

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Special Bulletin

A Japanese Perspective on the International Energy Landscape (229)

July 23, 2014

Second International LNG Joint Study Meeting in 2015
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn July 22, this year's second international LNG joint study meeting took place at theIEEJ. The meeting was launched in 2014 as announced at the second LNG Producer-Consumer
Conference in September 2013. It opened twice last year. The latest was this year's second meeting
following the first one in June. Recommendations based on last year's two meetings were submitted
and published at the third LNG Producer-Consumer Conference in November 2014. In a similar way,recommendations will be compiled based on discussions at this year's two meetings for theirpublication at the fourth LNG Producer-Consumer Conference planned for September this year. At
the second international LNG joint study meeting this year, experts from Asia, Europe, North
America, the Middle East, Russia and other regions had vigorous discussions toward the compilationof recommendations. This report does not cover the recommendations to be drafted from now on.
Instead, this report discusses key points that were interesting to me at the latest meeting.

First, participants in the research meeting shared the view that global and Asian LNG
markets are undergoing major changes in which the factors affecting future prospects are very
uncertain. As symbolized by remarkable drops in spot LNG prices for the Asian market andsubstantial falls in long-term LNG contract prices linked to lowering crude oil prices, the Asian LNG
market is now seeing big waves of price drops and oversupply that are shaking market participants.
While the changes have brought about LNG procurement price drops for buyers, they havedifficulties in finding what would be the best future procurement strategy. Price drops have squeezed
LNG sellers' earnings and made it difficult for them to invest in future supply.

In a more complicated manner, the present weak prices can discourage investment in themedium to long-term expansion of supply, contributing to tightening the future supply-demandbalance in the future. A historical fact is that the supply-demand balance on commodity markets
tightens and loosens cyclically. In the case of gas, however, substantial amount of additional
investment is required for transportation and trading of gas. This means initial investment is verylarge for LNG supply projects. As a result, it can be argued that price falls can discourage suchinvestment more strongly, making such discouragement cyclical. Wild, cyclical price fluctuations are
not favorable both for sellers or buyers. They are problematic for the sound development of the LNG
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market.

Second, the participants agreed that the LNG market undergoing major changes is growing
more flexible and liquid. Historical changes in other energy markets, including the oil market, haveshown that international trade has grown more flexible and liquid gradually and steadily. The naturalgas market has grown more flexible and liquid in the United States and the United Kingdom. Suchchange has been enhanced over recent years in continental Europe. Of global LNG trade, spot andshort to medium-term trade, which had been exceptional in the past, now accounts for 30%. Spottrade alone might have reached some 10% of the total. In the future, U.S. LNG with supplyflexibility will expand its presence in the market. In Asia, calls will grow for relaxing or eliminating
the so-called destination clause for LNG trade. Japan and other major countries will liberalize orderegulate gas and electricity markets. These future developments will contribute to enhancing theflexibility and liquidity of the Asian LNG market.

Third, I would like to note that the abovementioned two points indicate the Asian LNG
market is changing or in transition. At present, various uncertainties in the market make it difficult tospecify where the transition is going, what the market will be like after the transition and how long
the transition will take. A participant at the study meeting gave an interesting view that buyers may
have to take a portfolio or diversification approach to address various potentials and risks in order tosurvive market competition. The diversification may target not only supply sources but also
procurement processes including pricing methods, combinations of spot, short to medium-term andlong-term contracts, and contract periods. How to respond to the changing market environment may
represent a key survival strategy for sellers as well. The strategy may naturally include how to
respond to buyers' strategies.

Another important common matter of interest at the study meeting was how to findwin-win solutions for both producers and consumers in the Asian LNG market that is very uncertain.
As a clean energy source backed by abundant resources and supply, LNG is greatly expected to playa more important role in future global and Asian energy mixes. What is required to realize theexpectation is a common key challenge for LNG producers and consumers. Any great expectation
could fail to be realized in the real energy market. Such failure may be understood as an actualproblem, given the European situation where natural gas demand is seriously slack. Both producers
and consumers in the Asian LNG market will be required to make their respective efforts to findsolutions desirable for both.

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Contact: report@tky.ieej.or.jp
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