The EU and Japan have agreed to push for reliable LNG spot price indices as part of joint efforts to make LNG markets more liquid, flexible and transparent in a memorandum of cooperation signed Tuesday in Brussels.
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The move comes amid a growing global LNG supply glut, likely to increase buyers' demands for LNG prices based on gas market fundamentals, rather than the traditional oil-price link of long-term contracts.
The EU and Japan, which together account for nearly half of global LNG demand, agreed to exchange experiences and explore possible cooperation "in establishing reliable LNG spot price indices, reflecting the true LNG demand and supply."
They also agreed to promote "physical and LNG-based financial trade" in the memorandum, which was signed by EU Climate Action and Energy Commissioner Miguel Arias Canete and Japan's Minister for Economy, Trade and Industry Hiroshige Seko.
The EU and Japan also agreed to promote ending resale restrictions in contracts, such as destination clauses, and making other contract terms more flexible, such as duration, price setting and reviews.
"The goal of both parties is to involve all LNG producers and consumers in the joint activities," a European Commission source said.
Seko invited Canete to attend METI's next annual LNG producer-consumer conference in Tokyo on October 18.
The memorandum is to last initially for 10 years and is not binding.
It also covers cooperation on emergency responses and mitigating unexpected disruptions, as well as mitigating methane emissions along the LNG value chain and enhancing coordination in international fora and organizations.
The EU and Japan also plan to explore possible cooperation on technologies important for liquid and flexible LNG markets, such as small-scale LNG, floating storage regasification units, floating LNG facilities, and LNG for transport and shipping.
Japan is facing an oversupply of contracted LNG just as new projects and suppliers bring even more LNG to the global market.
Platts Analytics' Eclipse Energy estimates that Japan is overcontracted by 15.7 million mt in 2018, growing to 16.9 million mt in 2019 before falling to 3.1 million mt in 2022.
Many of Japan's long-term contracts include resale restrictions such as destination or profit-sharing clauses, which can make it difficult or unprofitable for buyers to resell excess gas, according to Japan's Fair Trade Commission.
The FTC said last month that all destination-specified contracts and more than 20 million mt/year worth of free on board contracts from now to 2024 have destination clauses.
It said that destination and profit-sharing clauses could in principle break Japanese competition rules and should be removed from new and renewed LNG contracts, and at least reviewed in existing contracts.
Destination clauses are already illegal in EU gas supply contracts.
RISE OF THE SPOT MARKET
Flexible spot LNG transactions and short-term contracts are becoming more common as a global market with new suppliers emerges, the EU and Japan said.
"The large amount of additional LNG exports from current and new suppliers is likely to change the physical flows of LNG trades worldwide and integrate European, North American and Asian natural gas markets," they said.
Spot gas prices between Asia, Europe and the US have converged in recent years as LNG links regional markets more closely.
Platts on Monday assessed the forward month August for the Japan Korea Marker, or JKM, Platts' benchmark LNG spot price index for the Asia Pacific basin, at $5.40/MMBtu.
It assessed the West India LNG index at $5.25/MMBtu, the main European gas hub price, the Dutch TTF, at $4.874/MMBtu, and the UK's NBP at $4.533/MMBtu.
The NYMEX August natural gas futures contract in the US closed at $2.929/MMBtu on Monday.
But most LNG long-term contracts in Japan are linked to trailing three-month average Japan Crude Cocktail, or JCC, index prices, based on a basket of Japan's custom-cleared crude import prices plus a constant to reflect freight and other costs.
Japan's ministry responsible for energy, METI, already has an action plan for creating an LNG trading hub by the early 2020s, which would require third-party access to LNG terminals, connecting pipeline networks and building underground storage facilities.
Platts analyzed the challenges facing Japan's oil and LNG markets in a special report last September, available here.
Meanwhile, the European Commission also has a specific EU strategy to promote LNG and gas storage, adopted in February 2016, which includes diplomatic efforts to work with LNG producers and consumers to remove trade barriers.
"With the foreseen liquefaction boom, there is room to further diversify [our] supplies, notably through LNG sourced from the US," the EC source said.
Spain has already taken five US LNG spot cargoes, Portugal four, Italy two, and the Netherlands, Poland and the UK one each.
Polish and US companies are also discussing a long-term commercial LNG supply contract, Polish President Andrzej Duda said this month, without naming them.
The EU wants to finish integrating its internal gas market to ensure it is attractive to LNG and other gas suppliers, the EC source said.
"[We have] a gas market of around 450 Bcm/year, with regasification capacity of over 200 Bcm/year at 24 LNG terminals along Europe's shores with non-discriminatory access," the source said. "[We want] to feed these terminals with competitively priced LNG."
The EU's own gas output is declining, creating increased demand for gas imports even as overall demand remains stable.
The EU imports most of its gas through pipelines, with Russia its biggest single supplier.
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--Edited by Jason Lindquist, firstname.lastname@example.org