IEEJ： November 2014

○ｃ IEEJ 2014

Special Bulletin

A Japanese Perspective on the International Energy Landscape (194)November 12, 2014

The Third LNG Producer-Consumer Conference
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn November 6, the LNG Producer-Consumer Conference 2014 took place in Tokyo. Japan,
the largest LNG consumer in the world, has hosted the annual conference since 2012. Sponsoring thethird conference were the Ministry of Economy, Trade and Industry and the Asia Pacific Energy
Research Center. The number of participants in the latest conference hit a record exceeding 1,000.
They had heated discussions on the future outlook and challenges for the LNG market.

In the opening and keynote address session, Japanese METI Minister Yoichi Miyazawadelivered a speech. So did the Qatari, Australian and Canadian energy ministers and the International
Energy Agency executive director. Later, government officials, top executives of major LNG value
chain companies and famed researchers made presentations followed by questions and answers infour sessions. In the following, I would like to compile impressive points for me about theconference.

First, participants in the third LNG producer-consumer conference increased their recognitionof the annual conference as a key forum for discussing LNG problems. At the first conference thatcame in 2012, most of the foreign participants were groping for purposes, objectives and details of
the gathering while being greatly interested in discussions there. Through the second and thirdconferences, however, major participants from Japan and other countries have deepened theirunderstanding about the characteristics and importance of the forum. As a result, major participants
have apparently become confident that it would be very important for them to take part in the forum
as stakeholders and appropriately form opinions. Given the presence of many high-level participants,
the conference has grown more significant as an opportunity for participants to conduct networking
and have business talks.

Second, it was interesting for me to see discussions being deepened with additional inputs
given by new participants. The first conference dealt with potential U.S. LNG exports as a major

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topic. The second came as U.S. LNG exports grew realistic through approval by the U.S.
government. Discussions at the third conference were based on new Asian LNG market
developments including U.S.-approved LNG exports’ expansion to nearly 80 million tons, newAustralian LNG project launching, a China-Russia gas supply agreement and moves regarding
Japan’s restart of nuclear plants. These developments and the recent rapid fall in crude oil prices
have created new uncertainties about global and Asian LNG markets. Major LNG market players are
now required to consider how to respond to the emerging uncertainties. At the latest conference,
LNG producers and consumers remained apart over some points related to the future course of theLNG market. But I felt that LNG market players were seriously exploring how to adapt and respondto new market developments and realities. Through such exploration, they will find solutions fordeveloping the LNG market further.

It was significant that new opinions, knowledge and input in the conference included a
Chinese perspective presented by a panelist from the CNPC Economic and Technology ResearchInstitute, who participated in the conference for the first time as a speaker representing China. The
Chinese panelist gave a clear, interesting message that more competitive LNG procurement would
be decisively essential as LNG is now less price competitive than rival fuels including coal and othernatural gas supply (such as domestically produced gas and imported pipeline gas). Many supply-side
topics were related to future U.S. LNG exports. In this respect, it was significant that discussions
covered Alaska and Oregon LNG projects that offer a new LNG supply option from the West Coastof North America and differ from those on the coast of Gulf of Mexico in terms of transportation
distance and economic competitiveness.

Third, it was interesting that discussions on Asian LNG pricing were based on the emerging
situation. The rapid crude oil price decline, as noted earlier, is now exerting downward pressure on
Asian LNG import prices that are linked to crude oil prices. This development benefits Asian LNG
importers. But it is a big problem for LNG projects subject to high LNG supply costs. Future crude
oil price changes could affect the decision for Final Investment Decision and thus the start-up.
Supply, demand and prices may inevitably be cyclic for energy products subject to internationaltransactions. As noted by many conference participants (particularly those from LNG consumingcountries), we must closely watch discussions on LNG contracts amid a soft LNG market expected
for the next several years.

In this respect, we must pay attention to the point that discussions on LNG price levels areoccasionally mixed or confused with those on the rationality of pricing formulas. While therationality itself is difficult to define, a key point is that a desirable pricing formula should be trusted2

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○ｃ IEEJ 2014by both sellers and buyers and be sustainable. A very interesting view presented at the conference
was that given practices and experiences in non-Asian markets, Asia will take much time to establish
the abovementioned sustainable formula and may have to depend on price adjustments responding tomarket supply and demand conditions for the immediate future. In this context, LNG market players
will remain highly interested in future developments regarding institutional reform efforts toestablish Asian natural gas/LNG trading hubs and enhance LNG market liquidity, as well as theremoval or relaxation of the destination clause in gas contracts and other efforts to increase theflexibility of trading.

Contact: report@tky.ieej.or.jp
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http://eneken.ieej.or.jp/en/special_bulletin.html

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