Tag Archives: gas

Japan seeks more control over gas pricing

LNG, short for Liquefied Natural Gas, is the artificial-converted liquid form of methane for convenience of storage and transportation. Over long-distance transmission, LNG is more efficient and economical than pipelines. After transported to certain destination, LNG will be retransformed into gas form and used directly or transported through pipelines.

As the world largest LNG importer, Japan inlets about 40% of total global LNG production, primarily from Malaysia and Indonesia. Last year the number hits a new record to 87.49 million tonnes, which is a reflection of soaring demand of LNG under the calamitous Fukushima nuclear plants failure in 2011. As a result, natural gas in Asia also hit a record last year.

Under situation like this, Japanese firms acted positively to seek for more say over the pricing of this crucial fuel. Comparatively, as I said before in my past blog, Japanese firms paid about $18 per million British thermal units, almost 5 times as that in the U.S. ($4 per mmBtu). One reason of this, as mentioned above, is the ever-rising demand for LNG in Asia (Korea is the second largest LNG import nation while China lies in the third). Another reason is the unsound spot market for LNG. According to WSJ, Japan’s government sees the creation of an accurate measure of the fuel’s value as a necessary step in making progress toward launching futures contracts by March 2015, a goal it announced last April.

As a clever move favored by Japan government, this plan has several potential benefits:

Benefit 1: help to smoothing price fluctuation. This is the main reason behind. Currently the natural gas prices expectations are uneven among suppliers and consumers. From the suppliers’ point of view, the impact of Fukushima disaster has its long-lasting effect over the domestic demand of LNG import. Also for security reason, Korea is shifting its reliance on nuclear generation plants to more LNG exporting. Thus the prices of natural gas have a strong upward trend. However, the recent launched natural gas exporting plan in US acts opposite to it. As I mentioned in my past post, US natural gas generators has less profitability now, so they have to increase export to reduce domestic shale gas supply. Also an Australia LNG project is under construction by Inpex, the largest Japanese gas distributor. If this planned LNG projects in Australia come on stream as scheduled, Australia will overtake Qatar as the world’s largest LNG supplier by 2020. All suggesting a future boost of natural gas supply in Asia, which implies a downward prices trend. Binding the downward trend and upward trend could cause a fiercer price fluctuation and loss for both suppliers and consumers. The establishment of LNG future market could flatten such volatility with the power of gas contract.

Benefit 2: With higher demand for LNG, surging gas prices drag consumers away to alternatives. Under that, coal import and consumption has been increased over the recent years, causing a serious environmental pollution in Japan. The development of new spot and future gas market can help to reduce price and then air pollution from burning of coal.

Benefit 3: The final goal is a healthy global natural gas market like crude oil market. It will definitely benefit world-wide consumers and global environment.

Why Ukraine’s Gas Shutoff Could Actually Lead to Long Term Growth

Today Ukraine received another blow from Moscow as Russian natural gas provider, Gazprom announced that it will be raising the price of gas for Ukraine by 81%. The CEO of Gazprom, stated that he will raise the cost from $268.50 to $485.50 for 1000 cubic meters starting this month. Russia justified this economic attack by stating that it is due to Ukraine being late on $2.2 billion worth of payments on natural gas. (WSJ – Ukraine Leader Warns of Gas Shutoff)

Ukrainian Prime Minister Yatsenyuk responded to the economic attack by stating that Kiev will not accept the new prices and will take the case to the international arbitrage court. Currently natural gas is Ukraine’s largest imported product and more than half of all their natural gas imports come from Russia. Yatsenyuk announced that Ukraine will look for solutions to lower their exposure to Russian imported gas. One short term solution that has been in the works is to import 20 billion cubic meters with the help of the European Union from Hungary, Slovakia, and Poland. Russia claims that the importation from the EU will break Ukraine’s contract for natural gas importation, so it is unknown how viable this option will be.

In the short term, it is very likely that Ukraine will experience an economic recession as they continue to absorb economic pressures from Russia and have to deal with a limited gas supply. These pressures will undoubtedly hinder their manufacturing sector, as well as the rest of their economy. Despite the likelihood of the gas shortage crippling Ukraine in the short term, in the long term it will likely help Ukraine build stronger ties with the EU, which will help Ukraine develop in the long term after the Crimea conflict dwindles.

Prime Minister Yatsenyuk already vowed to leave the Gazprom pipelines to Europe alone, so by not tampering with the gas flow to Europe, Yatsenyuk signaled that he is more willing to work in accordance with the European Union in the future over Russia. If this trend continues it is likely that we will see further agreements signed between the EU and Ukraine that will open up more trade between the two markets. According to Martina Bozadzhieva, Head of Research for Frontier Strategy Group, as Ukraine integrates more strongly with the European Union there economy will grow. According to data from Frontier Strategy Group, “integration with the European Union tends to improve the operating environment of a nation.” (WSJ – Ukraine Turmoil Has Huge Impact on Multinational Businesses) In the short term Gazprom’s economic assault on Ukraine will likely be effective of forcing the Ukrainian economy into a recession, but it will also force Ukraine to seek the support of the EU and integrate itself further with the European economy. This fundamental change will help Ukraine in the long term and help it make a quicker recovery.