Challenges to JCC Pricing in Asian LNG Markets
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February 2014 Challenges to JCC Pricing in Asian LNG Markets Howard V Rogers and Jonathan Stern OIES PAPER: NG 81 The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2014 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-907555-92-3 February 2014: Challenges to JCC Pricing in Asian LNG Markets ii Contents Contents ................................................................................................................................................ iii Figures .................................................................................................................................................. iv Tables ..................................................................................................................................................... v Preface and Acknowledgements ........................................................................................................ vi Introduction: the LNG price fundamentals challenge in Asia .................................................................. 1 Chapter 1. LNG trade in the 2000s: the emergence of flexibility and global market connectivity .......... 3 Chapter 2. Gas demand trends and drivers for change in Asian LNG markets ..................................... 8 2.1 Asian gas demand and the impact of Fukushima ......................................................................... 8 2.2 LNG import prices in Japan, South Korea, Taiwan and China ................................................... 11 2.3 Asian spot price development post 2008 .................................................................................... 12 Chapter 3. The evolution of natural gas price formation: establishing market fundamentals for Asian LNG imports .............................................................................................................................. 15 3.1 Natural gas price formation ......................................................................................................... 15 North America ................................................................................................................................ 15 Europe ........................................................................................................................................... 16 Asian LNG importing countries ...................................................................................................... 17 3.2 Economic and market fundamentals of Asian LNG projects and contracts ................................ 18 Economic fundamentals ............................................................................................................. 18 Market fundamentals .................................................................................................................. 20 3.3 North American LNG exports at Henry Hub-related prices – hopes and risks ............................ 22 Chapter 4: The growth of spot and short term LNG trading in Asia 2006-12 ............................... 28 4.1 Individual positions of the five major Asian LNG importers ......................................................... 30 Japan ................................................................................................................................................. 30 South Korea ....................................................................................................................................... 31 Taiwan ............................................................................................................................................... 31 India ................................................................................................................................................... 32 China ................................................................................................................................................. 33 Chapter 5. The case for, and challenges facing, an Asian LNG trading hub ................................ 38 5.1 Differences between North American, European, and LNG importing Asian markets ............... 39 5.2 Possible locations for an Asian LNG hub .................................................................................... 40 Japan ................................................................................................................................................. 40 5.3 An Asian LNG hub – practical considerations and challenges.................................................... 41 Chapter 6. Summary and Conclusions: scenarios for future Asian LNG pricing and contracting .............................................................................................................................................................. 45 Scenarios for Asian LNG pricing and contracting in the 2010s and beyond.............................. 48 Appendix 1 – Membership of GIIGNL in 2014 .................................................................................. 50 Appendix 2 – List of US LNG export Free Trade Agreement countries ........................................ 52 Appendix 3 – US LNG Project Application Status, 5th October 2013 ............................................. 53 Appendix 4 – Assumptions used in Illustrative LNG demand projections ................................... 55 Japan ................................................................................................................................................. 55 South Korea ....................................................................................................................................... 56 Natural Gas Demand.................................................................................................................. 56 Taiwan ............................................................................................................................................... 57 Natural Gas Demand.................................................................................................................. 57 China ................................................................................................................................................. 58 India ................................................................................................................................................... 60 Glossary ............................................................................................................................................... 62 Bibliography ........................................................................................................................................ 63 February 2014: Challenges to JCC Pricing in Asian LNG Markets iii Figures Figure 1: Global LNG Imports 1964 - 2012 ............................................................................................. 3 Figure 2: Share of LNG and Inter-Regional Pipeline Gas in Global Gas Supply Flows 1995 – 2012 .... 4 Figure 3: Regional LNG Sources and Destinations by Month 2004 – 2013 ........................................... 6 Figure 4: European Supply, Demand and Imports 2008 – 2012 ............................................................ 7 Figure 5: Illustrative LNG Demand for the Five Main Asian Importers 2010 - 2025 ............................... 9 Figure 6: Estimated Japanese Power Generated in 2010 and 2011 (10 EPCOs) ............................... 10 Figure 7: Annual Net Profit/Loss for the 10 Largest Japanese Electric Power generating Companies. .............................................................................................................................................................. 11 Figure 8: LNG Average Monthly Import Prices ..................................................................................... 12 Figure 9: Regional Gas Prices January 2007 – December 2013 (Monthly Averages) ......................... 13 Figure 10: Total Capital Investment Costs for Selected LNG Projects (capex to first LNG supply) ..... 19 Figure 11: Nominal New-Built LNG Break-Even Prices of Selected LNG Projects (delivered to Tokyo Bay) ....................................................................................................................................................... 20 Figure 12: US LNG Export Project Capacity – Illustrative .................................................................... 25 Figure 13: Break-even Destination Market Prices for US LNG to Europe and Asia ............................. 26 Figure 14: Category of Ownership of Illustrative US LNG Export Project Capacity ............................. 27 Figure 15: Global LNG Supply by Contract Category 2006 - 2012 ...................................................... 29 Figure 16: LNG Supplied to Asia by Contract Category 2006 - 2012 ................................................... 29 Figure 17: LNG Supplied to Japan by Contract Category 2010 – 2012 and Illustrative Contestable Demand to 2025 ...................................................................................................................................