A Whole New World—Moving North American Gas to Japan and Korea

Japan takes up less real estate than California, and South Korea is smaller than Kentucky, but the two Asian nations are giants in the international liquefied natural gas (LNG) market. Their outsized appetite for LNG, combined with their interests in diversifying their sources of gas supply, could provide a major boost to U.S. and Canadian natural gas producers—only, though, if the price is right. Today, we continue our look at the fast-changing international market for LNG, rising Asia demand, and what these changes mean for gas producers and LNG exporters.

When you’re the world’s biggest buyer of something—no matter what the product may be—you have a lot of say. When Wal-Mart wants to buy 10 million bath towels (or picture frames or Avenger action figures) you can be sure it drives a hard bargain. The same holds true for energy buyers, particularly in a market like LNG that is still based largely on long-term deals and not short-term or spot purchases. Japan and South Korea are the Wal-Mart and Target of the LNG market, together accounting for 53% of 2014 LNG imports around the globe. (For simplicity’s sake, we’re going to refer to South Korea as Korea—Kim Jung Un’s North Korea is not exactly a player in this sector.) And while neither Japan nor Korea is expected to see anywhere near as much LNG demand growth over the next 20 years as China or India, for reasons we will explain they are likely to play a critically important role in changing the LNG market’s structure.

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In Episode 1 of our international LNG market series, we discussed the evolution of LNG pricing--at first prices were fixed, but starting with the OPEC oil crisis in 1973-74 oil and LNG prices were linked, with the goal of mitigating risks for LNG buyers and sellers). In Episode 2, we looked at five major catalysts shaking up the LNG trade: 1) New LNG capacity coming online, mostly in Australia and the U.S.; 2) Fixed liquefaction tolling agreements being offered by U.S. LNG developers and natural gas costs tied to price index percentages (typically 115%) of the U.S. Henry Hub, LA benchmark price; 3) The collapse in oil prices and the resulting drop in oil-indexed LNG prices; 4) The roll-off of long-term LNG supply deals and the increasing share of LNG capacity available to the spot market; and 5) The recent slump in Asian LNG demand-and prices--that have occasionally  made Western Europe a more attractive market for spot LNG sales. And in Episode 3, we looked at existing and future LNG demand in China and India, which are expected to be the world’s biggest LNG growth markets—along with the use of LNG as a ship bunker fuel. Today we look at Japan and Korea.

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