Asia's liquefied natural gas markets are facing a transformation with rising imports from U.S. shaking up a sector traditionally dominated by supplies from Australia, the Middle East, Russia and Southeast Asia.
With demand growth driven by economic expansion and, increasingly, by environmental concerns about coal (still the biggest contributor to Asia's energy mix), Asian countries require large LNG capacity investments and sophisticated financial structures.
But the current way of organizing the market around long-term -- 20-year -- contracts employed by established large importers such as Japan and South Korea will not suit today's emerging Asian buyers. They want a flexible market with arbitrage opportunities and transparent trading systems. They are more price-sensitive than Japan and other traditional importers and want the flexibility to adjust price and volume risks. In other words, they want an LNG market that functions rather like the oil market.
Fortunately, such a market is starting to emerge in Asia. But it needs a lot more development. In particular, we must eliminate one of the great bugbears of the traditional gas market -- destination restrictions under which suppliers are able to designate where their cargo goes. These restrictions, in effect, limit resale deals and so inhibit the development of a spot market, which in turn hinders the growth of futures trading.
A key opportunity to accelerate LNG strategies in Asia comes on Oct. 22, when energy ministers, industry representatives and experts gather in Nagoya for the 7th Annual LNG Producer Consumer Conference.
Chaired by Hiroshige Seko, Japan's trade minister, this is more than a symbolic exercise. Governments are looking for concrete recommendations for the LNG market. These recommendations will be developed by the Japan-U.S. Strategic Energy Partnership (JUSEP), a forum in which both countries bring their expertise to advancing gas-fired power generation and re-gasification using LNG supplies from the U.S. based on the shale gas revolution.
The U.S. is entering the Asian LNG market, which accounts for around 75% of global LNG. While Japan, South Korea and Taiwan have been dominant buyers, they are now joined by emerging players such as China, India, Thailand, Pakistan and Bangladesh. These emerging buyers are more price-sensitive than traditional buyers like Japan or South Korea, which prioritize supply security, even at high cost.
American LNG, coming alongside traditional suppliers such as the Middle East, Australia, Russia and Southeast Asia, can be a "game-changer" given its size and its flexibility in cargo destination. With a market share today of 2-3% in Asia, U.S. supplies are expected to reach 10-15 % within 10 years.
At last year's LNG conference, Seko announced a $10 billion Japanese commitment for financing LNG-related projects and technical training programs in countries seeking greater gas use. At the same event, U.S. Deputy Secretary of Energy Dan Brouillette reinforced America's commitment to expand LNG exports.
The program announced by Seko is underway and experts from the Japan Oil, Gas and Metals National Corp. have begun training programs including in India, Pakistan, Indonesia and Myanmar. Japan's Nippon Export and Investment Insurance and Japan Bank for International Cooperation have brought financial assistance for U.S. LNG liquefaction capacity in the Gulf of Mexico.
The U.S. is improving the regulatory process for approving LNG exports. Considerable headway has been made in preparing infrastructure to transport feedstock for U.S. LNG export sites from America's vast natural gas reserves.
These measures are important as Asia continues to seek fuel diversity, improved air quality, and responses to longer-term climate risk. Nevertheless, bringing new LNG liquefaction projects to fruition remains challenging in a market in which buyers are reluctant to make long-term purchase commitments.
A more flexible LNG market is emerging in Asia to address these concerns, and it may ultimately resemble the oil market with extensive arbitrage, futures markets, and transparent physical and financial trading systems. But we need a much more transparent market for LNG price discovery and eliminating destination restrictions.
The EU has shown the way by considering destination restriction anti-competitive in the early 2000s and succeeded in establishing liberalized European LNG market. The Japan Fair Trade Commission announced in June last year that destination clauses could be incompatible with the Anti-Monopoly Act of Japan -- and so took a big step forward to making Asian markets more transparent and flexible.
Competition authorities in other Asian countries including South Korea and China have started examining the issue. The U.S. administration has not yet made its position clear but seems to share the concern that overall social welfare is damaged by anti-competitive practices. Traditional suppliers are not happy to lose their long-term contracts but are having to do so under pressure from the growing competition.
Destination restrictions are now reportedly being removed in most new contracts. But buyers cannot easily get rid of such restrictions in existing contracts. The share of short-term and spot contracts has increased to almost 30% of global LNG supply.
We also need to assist emerging Asian economies with training to develop competitive electricity markets, build re-gasification facilities, and set up complex business structures. Investment vehicles are needed to address the reluctance of lenders and investors to make long-term commitments without 20-year "take or pay" contracts. Fortunately, interesting solutions are emerging such as a cross investment by downstream players in upstream projects.
A final note of optimism. The U.S.-Japanese cooperative effort on LNG provides a positive signal that the two great democracies of the Pacific, whatever short-term disputes might arise in this long-standing and important alliance, remain bound to together by shared values and interests, including sustaining stability throughout the Pacific Rim. Much like the LNG market, the alliance is a long-term commitment.
Masakazu Toyoda is chief executive officer of the Institute of Energy Economics Japan in Tokyo. Lucian Pugliaresi is president of the Energy Policy Research Foundation, Inc. in Washington, D.C. The 2017 and 2018 LNG assessments can be found at the organizations' websites, https://eneken.ieej.or.jp/en/ and http://www.eprinc.org.