IEEJ：October 2020©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (502)

October 14, 2020

LNG Producer-Consumer Conference 2020
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn October 12, the LNG Producer-Consumer Conference 2020 was held in the form of ateleconference. The annual conference, launched in 2012, has become an important meeting of
top-level policymakers, businesspersons and experts related to LNG and natural gas. Until theprevious year, the annual real conference had attracted more than 1,000 participants. This year’s
conference took the form of a teleconference for the first time due to the COVID-19 pandemic.
According to its sponsors (the Japanese Ministry of Economy, Trade and Industry and the Asia
Pacific Energy Research Center), more than 1,900 people from 52 economies in the world
participated in the teleconference on a registration basis, discussing how best to achieve thedevelopment of the LNG market as a common goal for LNG producers, suppliers and consumers.
The website for the teleconference posted numerous video messages from relevant
ministers, industry leaders and globally famed experts. In the first of the three sessions of theconference, opening remarks were delivered by Japanese Minister of Economy, Trade and IndustryHiroshi Kajiyama and Qatari Minister of State for Energy Affairs Saad Sherida Al-Kaabi, followedby a keynote address by International Energy Agency Executive Director Fatih Birol. Paneldiscussions by LNG industry representatives were held in the second session titled “Pricemechanism favorable and sustainable for both producer and consumer of LNG” and the third one
titled “Decarbonization through LNG value chain.” I served as moderator for the second session.
Various issues were discussed for the further development of the LNG market. In the following, I
would like to make my comments on the LNG producer-consumer conference with main focun
given to the discussion at the second session I moderated.
Great hopes are placed on LNG market development. LNG has grown as a clean, abundant
energy source and is expected to diffuse further on the strength of economic growth mainly in Asia.
While future demand for fossil fuels as a whole is uncertain because of global low-carbonization anddecarbonization initiatives, LNG demand is expected to robustly increase mainly in Asia in theforeseeable future. This is because Asian emerging and developing countries are expected tocontinue robust economic growth and give priority to the clean energy source to counter climatechange and air pollution. It is important that natural gas and LNG expansion is significant andefficient for improving environmental problems in Asia where coal accounts for a major share of theenergy mix. If the ambitious target of carbon neutrality is set in Asia over the long term, demand fornatural gas and LNG, the cleanest among fossil fuels, may be affected. Then, innovative approaches
such as the decarbonization of natural gas and LNG will become more important.
If Asia and the world clean energy supply and use systems generally to counter climatechange, it may be important to cut costs for transition to the cleaner systems as much as possible. In
this respect, how best to use natural gas and LNG would be significant for the minimization of suchtransition costs, depending on national or regional realities. The effective, sound, and steady use of1

IEEJ：October 2020©IEEJ 2020
LNG would be a challenge that all LNG stakeholders would pursue.
Although LNG consumption had smoothly grown and expanded, the impact of theCOVID-19 disaster has been enormous. Even before the disaster, the LNG market had been
expected to see oversupply in 2020. Then, the disaster plunged the global economy into the worst
situation since the Great Depression, leading demand for LNG and other energy sources to crash. Asa result, LNG market oversupply has become even deeper, with spot LNG prices hitting the lowest
levels in history temporarily. The LNG market has made various reactions to the remarkable
oversupply and low prices. The pressure of low prices has prompted high-cost LNG supplies to exitfrom the LNG market and refrain from investment in future supply expansion. On the demand side,
low prices have been exploited to stimulate demand. All LNG stakeholders are trying to rebalance
the LNG market still plagued with the COVID-19 disaster.
Price functions usually play a key role in rebalancing the market. The energy market adagethat low prices are the best cure for low prices (and vice versa) is based on a simple economic
principle that low prices push down supply and stimulate demand. In today’s Asian LNG market,
however, this simple economic principle is not necessarily plausible. This is because LNG prices areindexed to crude oil prices under term contracts that cover most of LNG supply in Asia. As a matterof course, there are reasons and backgrounds for the indexation of LNG prices to crude oil prices inAsia. The fact that the pricing formula has been adopted through various arguments and negotiations
should be taken seriously. Participants in the LNG producer-consumer conference provided positive
or constructive opinions on how and whether the Asian LNG pricing formula would or should betransformed, while fully understanding the role of the traditional pricing formula.
Given various structural changes seen in the LNG market, it may be increasingly
understood that transitions from traditional business styles are becoming inevitable. A simple or
straight opinion that prices of the commodity known as LNG should be determined in a manner toreflet supply and demand in regions or markets where it is traded has become stronger. In fact,
Europe and the United States have already been making a transition to a natural gas pricing formulareflecting supply and demand of the commodity. In Asia, such transition could be slower than inother regions due to the dominance of traditional LNG transactions but would make steady progress,
according to the discussion. As a matter of course, attention should be paid not only to thedominance of traditional business relations but also to how best to recover enormous initialinvestment unique to the LNG industry. The smooth implementation of enormous investment canexpand both LNG supply and demand together.
An important point is that a pricing formula reflecting supply and demand does notnecessarily guarantee low prices. As seen under the current COVID-19 disaster, sluggish demandand oversupply push down prices that reflect the supply-demand relationship. Conversely, supply
shortages push up prices. Such price volatility is inevitable under any pricing formula based onmarket functions. All LNG stakeholders should fully understand this point and pursue a sustainablepricing formula. They are required to concentrate their wisdom to find solutions to how they should
exploit looming signals of spot LNG prices reflecting the supply-demand relationship in Asia, what
pricing formula should be pursued from the long-term point of view, and how the LNG market
should change. For the LNG market’s further development, all stakeholders’ future efforts will groweven more important.
Contact: report@tky.ieej.or.jp
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