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.