Spot LNG prices likely to be 'sticky' amid supply woes, low Europe stocks: JERA Global CEO

Spot LNG prices are likely to be "sticky" at a relatively high level amid Middle East supply disruptions and low gas storage in Europe, Yukio Kani, global CEO and chairman of Japan's largest power generation company, JERA, said June 24.

"My view is that prices may be sticky and may not fall very easily," Kani told a press conference in Tokyo.

Platts, part of S&P Global Energy, assessed JKM -- the benchmark price reflecting LNG delivered to Northeast Asia -- for August at $15.521/million British thermal units on June 24, compared with the prewar level of $10.697/MMBtu on Feb. 27.

Kani said Qatari LNG facilities had been damaged during the Middle East conflict and that the damaged facilities might not be restored "within two or three years" based on JERA's experience in LNG upstream investment and construction.

QatarEnergy expects the damaged LNG facilities to take three to five years to repair, with about 17% of the supplier's export capacity taken offline, CEO Saad al-Kaabi said in a March 19 statement.

"Another factor we are watching is the situation in Europe this coming winter," Kani said, referring to the EU ban on Russian LNG imports from Jan. 1, 2027.

"Europe has large gas storage facilities, and it usually fills those storage sites to raise inventory levels so that it does not have to buy too much spot LNG, and then manages through to spring."

"However, inventories are currently low. If Europe tries to fill those inventories without buying Russian gas or LNG, it will have to purchase a certain amount on the spot market," Kani said.

EU gas storage sites were 46.97% full as of June 23, according to the latest data published by Gas Infrastructure Europe.

Curbing spot volume

Speaking at the press conference at JERA's headquarters, President and CEO Hisahide Okuda said the company expects the LNG supply-demand balance to remain tight amid uncertainty over the resolution of the Middle East situation and damage to LNG supply facilities.

"During that period, the supply-demand balance for LNG will essentially remain tight, and in such an environment, even a minor event could easily cause spot prices to spike. We believe that this kind of environment will continue for some time," Okuda said.

"Therefore, we believe it is necessary to come up with measures to reduce the volume of LNG procured on the spot market as much as possible. In fact, LNG spot prices are directly linked to trading prices in the domestic spot power market."

Okuda said he made a set of proposals to curb spot LNG procurements during a March 10 public-private liaison meeting, which was held to discuss steps for intercompany LNG transfers and alternative spot procurement in light of the situation in Iran and the suspension of LNG production in Qatar.

Among the proposals, Okuda called for sharing LNG inventories and cooperating in reallocating LNG among importers.

"Normally, competition law prevents participants from knowing each other's inventory information. However, in an emergency situation, the government can take stock of inventory levels and then divert LNG from where there is an excess to where there is a shortfall, so as to avoid buying additional LNG on the spot market," Okuda said.

Okuda also called for using coal-fired power plants at full capacity to reduce excess LNG use.

"In general, spring and autumn operations partially suppress coal generation to reduce environmental impacts," Okuda said. "But by running at full capacity, we can maintain higher LNG inventories for the summer and winter periods. As a result, it becomes possible to suppress spot LNG procurement during summer and winter."

He said the government had moved quickly and implemented measures accordingly.

Coal use

As a resource-poor country, Okuda said Japan should be more flexible in utilizing coal-fired power generation in normal and emergency situations.

"As for coal-fired power generation, we should emphasize the perspective that it is resilient to geopolitical risks and utilize it by distinguishing between normal times and emergencies," Okuda said, adding that the country should limit coal-fired power output to cut CO2 emissions during normal times and increase operating rates to avoid having to buy expensive LNG on the spot market.

To link the use of coal-fired power generation in emergencies to reductions in customer burden, Okuda said it is necessary to conclude a coal-fired power purchase agreement in advance with retail electricity providers.

JERA is considering reselling long-term PPAs of several years -- including those covering coal-fired capacity -- starting as early as this summer, Okuda told Platts.

Amid continued volatility in the domestic spot power market, Okuda said JERA will start selling a product July 1 to hedge the risk of rising spot prices during both peak and off-peak hours through its Japanese power trading arm, JERA Global Markets.