LNG Roundtable: Asian players discuss growing pricing transparency and LNG MOC

The Middle East LNG Institute facilitated The LNG Roundtable, supported by S&P Global Platts, in Singapore in July. Against the backdrop of LNG’s fast-increasing commoditization, participants debated “How to Trigger ‘LNG Markets 2.0’ to be Fit for Purpose for the Great Energy Transition?”, with 45 individuals from more than 30 of Asia’s key LNG trading, broking and exchange companies participating, the vast majority actively contributing to the event’s discussions.

Price assessment evolves with LNG’s commoditization

During the roundtable, players shared their increasing comfort with, and in many cases eagerness to expedite, the growing transparency and speed of LNG transactions. While participants generally agreed the industry requires more efficient and transparent pricing, the specific processes to facilitate this were debated.

Platts has always used the Market on Close (MOC) methodology to assess LNG prices, including the benchmark JKM. Since June 13, 2018, companies have begun reporting firm and transparent bids, offers and trades in the Platts MOC process. Now, in addition to the market survey, Platts is using high-quality and verifiable information in the forms of these bids, offers and trades in the assessment process. The LNG MOC is a structured approach to price assessment.

Between June 13 and August 30, 2018, there were 66 transparent bids/offers submitted by seven entities, with one trade, published in the LNG MOC.

The LNG Roundtable discussions focused on three key LNG MOC-related themes:

1. Detailed definition of a standard JKM bid/offer, to facilitate the normalization of non-standard bids/offers/trades for JKM’s price assessment

The non-standard nature of many LNG bids/offers/trades means normalizations can be required to assess their impact on Platts LNG price assessments. In the case of the JKM, given the increased detail of LNG MOC bids/offers/trades, participants highlighted the need for more detail regarding what constitutes a normal JKM bid/offer/trade. During the roundtable, participants conveyed this would further boost understanding of Platts’ daily JKM assessments.

In August, Platts proposed further refinement and standardization to the JKM’s typical trading terms. These encompassed the delivery window, discharge location, loading location, quality, quantity and LNG vessel.

Participants in the MOC process should clearly state, in submitted bids or offers, terms that differ from these standards.

For further details, please see this Platts Subscriber Note.

2. Clarification of the relationship between JKM physical and JKM derivative price assessments

Approved LNG MOC participants can submit bid/offer/trade information priced in a variety of ways, including outright price bids/offers, floating price bids/offers, and combinations of fixed and floating prices.

For floating and spread price bids/offers/trades submitted, Platts establishes their hedgeable outright value by applying them to the observable, prevailing value of underlying relevant derivatives instruments. The objective is to assess the prevailing tradeable outright price of the commodity at the close of the market assessment period. Outright price submissions take precedence in the editorial process at all times.

For further details, please see this Platts Subscriber Note(opens in a new tab).

3. Requirement for further LNG MOC education

The high levels of transparency associated with the LNG MOC’s firm, and detailed, bids/offers requires adjustment in trading practices from some LNG players accustomed to transacting in relative opacity for decades. Questions raised during the roundtable included the length of time allowed for participants to finalize trades and/or adjust their bids/offers, the normalization process and LNG MOC’s daily timings.

Note: All times displayed in the above slide are Singapore-time.

In addition to regular event presentations and one-on-one meetings with LNG participants, in August Platts published a video(opens in a new tab) and an FAQ document(opens in a new tab) further explaining the LNG MOC process.

Increased LNG MOC understanding supporting participation

The roundtable confirmed the LNG market’s direction is generally accepted – increasing commoditization, requiring more transparent, firm and detailed bids and offers. Proactive steps by both LNG players and Platts have resulted in more than 15 entities already approved to submit bids and offers in the LNG MOC, including buyers, sellers and traders. In addition, many more companies are currently undergoing the approval process.

Growing LNG MOC understanding, particularly pricing normalizations as well as physical and derivative pricing relationships, will likely continue driving MOC participation across the LNG value chain.