Wood Mackenzie has warned that uncertainty around policy and regulation in Japan and South Korea may lead to a reduction in new liquefied natural gas (LNG) supply development, resulting in continued parsimony in the Pacific LNG market beyond 2020, and high spot prices. This strikes a direct contrast to the general market consensus that anticipates market liberation around 2018. Although Japanese and South Korean governments are encouraging competition between new LNG suppliers in a bid to reduce LNG prices, uncertainty around nuclear generation and market liberalisation could have the adverse effect, resulting in an increase in LNG costs.
50% of Global LNG
Together, Japan and South Korea represent over 50% of global LNG demand today. In light of the uncertainty surrounding LNG demand, the two countries are buying only what they are certain to need. Companies new to gas and power markets are awaiting regulatory intelligence before agreeing to off-take.
Gavin Thompson, Head of Asia Pacific Gas and Power Analysis for Wood Mackenzie, said: “Both governments recognise their influence on the global LNG market and are actively pursuing initiatives aimed at reducing overall LNG supply costs through increasing competition between global LNG suppliers. However, a lack of clarity around the timing and extent of market liberalisation as well as ongoing uncertainty around nuclear power in their domestic markets could have the opposite effect."
He continued: "Power market liberalisation could erode the regional monopolies of traditional power utilities and enable other players such as gas utilities, industrials and downstream companies to enter the market. Uncertainty about the future regulatory and competitive environment could result in all players delaying firm LNG procurement decisions."
In South Korea, liberalization of the gas market, contract renegotiations, and the potential for new buyers to be able to secure LNG at prices below the average of LOGAS, is preventing the company from buying new long-term LNG. Moreover, governmental confidence surrounding the future expansion of coal and nuclear power is subordinating the country’s LNG requirements.
Wood Mackenzie predicts that Japan and South Korea’s requirement for LNG, as well as that already contracted, will be 30 million tpy by 2020. Mr. Thompson said: “The appetite for firm LNG procurement is lower compared to the demand outlook. This likely shortfall will need to be met by the spot market, Qatar or portfolio players. Portfolio players are particularly interesting as it is possible that existing and emerging portfolio players, some of them Chinese and Indian, start going long on LNG to secure market. This would introduce greater liquidity to the market, overcome the procurement shortfall from Japan and South Korea and drive spot prices down. But it is not yet clear whether portfolio players are willing to do that."
"The governments of Japan and South Korea” Mr. Thompson surmises, “are rightfully looking to reduce overall energy costs to maintain competitiveness within their broader economies. However, the uncertainty that these policies have introduced could be counter-productive. Projects need some security of contracted volumes in order to be assured of commercial viability. Without this security, these projects will not be developed in line with market demand. The wave of supply expected to come online around 2018 will likely be delayed as a result, and risk LNG procurement costs rising. While portfolio players could aggressively launch new supply to fill this gap, potentially pushing down Pacific spot prices, it is not yet clear how much volume risk portfolio players are willing to take."
Edited from various sources by Ted Monroe
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