I IEEJ：August 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (443)

August 30, 2019

How to View Future Asian LNG Market (2): Discussion in Malaysia
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
On August 29 and 30, I had an opportunity to discuss energy issues with Malaysian energy
industry people, experts and government officials in Malaysia. One of the central topics there was how
to view the future Asian liquefied natural gas (LNG) market. This paper deals with the same topic as
the previous one (The 442nd issue of “A Japanese Perspective on the International Energy Landscape”),
based on the discussion in Malaysia.
The biggest matters of interest to participants in the Malaysian discussion included slack
Asian spot LNG prices and oversupply in the market. While LNG demand has been increasing since
the beginning of this year, spot LNG prices have remained slack at levels far below $5 per million
British thermal units (MMBtu). This is because supply has been growing faster than demand. TheLNG market has seen increasing oversupply as new LNG projects have entered the production phase
one after another in such countries as Australia and the United States.
According to an outlook given by the Institute of Energy Economics, Japan, in July, global
LNG demand would total 340 million tons against 350 million tons in supply in 2019 and 356 million
tons against 388 million tons in 2020, indicating that supply’s excess over demand would widen further.
Based on the outlook, discussion participants noted that slack spot LNG prices and oversupply could
be difficult to resolve and continue in the immediate future.
As seen in winter 2017 and 2018, however, spot LNG prices could turn upward with thesupply-demand balance tightening on weather conditions and unanticipated supply disruptions andother factors. In the future, we will have to closely watch developments regarding supply and demandin the global LNG market including the Asian market. While noting that the slack prices and loosening
supply-demand balance would continue in the immediate future, discussion participants pointed outthat present price levels would not be sustainable.
Prices below $5/MMBtu contribute to stimulating LNG demand in emerging and developing
countries where income levels are relatively lower, but they make it difficult to make final
investment decision for new LNG projects. If demand continues increasing with supply growth
decelerating, market may go in the direction of rebalancing to reverse the current slackness of prices.
In this sense, the present spot LNG prices would not be sustainable.
In this respect, talks on the future Chinese market were interesting. While demand in theAsian LNG market has continued growing, LNG demand has been sluggish in the traditional LNG
markets of Japan, South Korea and Taiwan since the beginning of this year. In contrast, demand in
emerging markets including China has been expanding in a manner to support overall demand growthin the Asian market.
The problem here is the U.S.-China trade war risking an economic slowdown. As the United1

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States and China have exchanged retaliatory tariff hikes to escalate and bog down their trade war,concerns have grown about downside risks for the U.S. and Chinese economies. Any Chinese
economic slowdown could affect LNG demand. In such case, the present oversupply feeling wouldgrow even stronger. As far as demand in China and other emerging countries structurally supports theLNG market, the trade war and relevant economic downside risks may remain important for
anticipating the future LNG market.
Amid oversupply, LNG inflow into Europe is also expanding. The deep European market
has become the last resort for absorbing cheap LNG. While natural gas demand has been leveling offor rising slightly in Europe, demand for imports has been increasing due to falling regional natural gas
production. Given that Europe has multiple natural gas import options including pipeline gas importfrom Russia, cheap spot LNG prices can increase the competitiveness of the LNG import option. Thisis because the liquidity of the global LNG market has increased. In this sense, we must closely watch
not only the Asian market but also the European market.
At a time when spot LNG prices are slack and likely to fall further, their gap with long-term
LNG procurement contract prices is attracting market participants’ attention. Long-term LNG contract
prices in the Asian market are mostly indexed to crude oil prices. At present, the average long-term
LNG contract price is estimated at just below $10/MMBtu, some $5/MMBtu above theabovementioned spot prices. Depending on future crude oil and spot LNT prices, the gap could remain
wide or expand further. Discussions in such market environment led me to feel that LNG buyers areincreasingly hoping to revise long-term contracts and take maximum advantage of the present lowprice spot market environment.
When a wide gap emerges between long-term contract and spot prices of the same good(LNG or natural gas), buyers and sellers of the good have tough negotiations on the revision of contract
terms and conditions, as often seen in Europe and the United States in the past. How such negotiations
would be conducted in Asia is a key point for how to view the future Asian LNG market.
Although the LNG market is still less liquid than the oil market, spot LNG transactions now
account for 25% of total LNG trade. Spot and short-term contract transactions capture more than 30%.
As U.S. LNG supply free from the destination clause is increasing, LNG buyers are seeking more
flexible terms and conditions. As the LNG market goes in the direction of globalization andcommoditization, the price affordability for the consumption side will grow even more important alongwith prices and mechanisms for investment in supply expansion to allow the LNG market to develop
soundly.
In considering the future course of Asian LNG, we should look not only at the LNG market
but also at markets for LNG’s rival energy sources such as coal, renewable energy, nuclear andliquefied petroleum gas. At the same time, we must pay attention to the fact that LNG competes withdomestically produced natural gas and pipeline natural gas import. In considering these points, wemust take energy security and environmental problems into account. Regarding urgent air pollution in
Asia among environmental problems, the growing requirement for switching from coal to gas can playa role in boosting demand for natural gas or LNG. If moves to fundamentally reduce greenhouse gas
emissions in developed countries spread to Asia over a long term, however, natural gas or LNG maybecome subject to the impact of deep GHG emission cuts. Although Asia has yet to reach such stage,the impact of climate change countermeasures on natural gas or LNG has become a grave matter ofconcern in Asia, as indicated by the Malaysian discussion.
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