London — The world's biggest LNG buyer, Japan's JERA, is continuously working to ensure it is in possession of a balanced LNG portfolio, top company official Hendrik Gordenker said in an interview with S&P Global Platts this week.
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Register NowGordenker, who until April was JERA chairman and is now senior corporate vice president, also said the LNG industry should use the current period of "ample supply" to work to further develop the market and further commoditize LNG.
JERA handles some 35 million mt/year of LNG -- more than 10% of the global total -- and its portfolio is made up of a wide range of different contracts.
"We need to have a balanced portfolio. It needs to be balanced in terms of duration. We want to have a mix of FOB and ex-ship deliveries -- maybe more FOB is needed now than in the past -- but we should have a mix," Gordenker said.
"We want a mix of geographical sources and an appropriate mix of pricing -- there are a lot of factors to take into account when building a portfolio," he said.
Gordenker added that balancing its LNG portfolio was "always going to be a work in progress. It's not a static thing -- it's a dynamic picture.""We have to look at it, think about it and take action every day."
MARKET CONDITIONS
Gordenker said the global LNG market was currently "amply supplied" -- a state of play the industry should use to help promote LNG in new markets and push toward a more liquid futures market.
"We should be smarter about how we see the development of the market in planning how we map this out," he said.
"We should use this period to develop the markets, develop price markers and deeper forward markets, so that in addition to being able to trade the LNG we can also begin to manage the risks and have a forward outlook on pricing." From a low base, the LNG derivatives market has seen impressive growth over the past three years, a trend that seems set to continue given the increasing volume and scope of the physical market.
JKM derivatives volume growth in 2018 stood at 256% year on year, following growth of 295% in 2017.
"An amply supplied market gives everyone the opportunity to work with a greater liquidity and to try to create more of a commodity," Gordenker said.
Low prices are also leading to new demand opening up, which could offset declining demand in Japan.
Japan has traditionally been the driver of much of global LNG demand, while the country's recent market liberalization has led to a relaxation of destination clauses.
"That kind of destination flexibility needs to be accepted. That's how the rules work, that's how all new contracts have to be," Gordenker said.
"And we're very pleased that in discussions with existing suppliers they are showing themselves open to updating contract terms to be in compliance with the current status of Japanese law."
DEMAND UNCERTAINTY
LNG consumption in Japan is decreasing, which Gordenker said was a product of improved technology, better energy efficiency and an increase in renewable power generation.
Against that background, it is a challenge for companies like JERA to predict how much LNG is needed.
"There remains uncertainty about what exactly the level of LNG demand will be," he said. "We have continued uncertainty about nuclear restarts, we have the emergence of renewable energy. But the system for supporting renewable energy is under revision, and maybe that will slow down. There are a lot of uncertainties."
"LNG sits there as the way to bridge all of those uncertainties. We like to play that role very capably to make sure Japan is always reliably supplied with energy, but it's a challenge to handle that," he said.
JERA and other LNG buyers have in the past few years also joined forces to sign term import deals.
JERA most recently agreed with Taiwan's CPC a 17-year deal to jointly purchase 1.6 million mt/year of LNG from the Total-operated Mozambique LNG project.
Gordenker said this was not a new phenomenon, but was always welcomed.
"It seems a little bit forgotten that in the early days of LNG a lot of contracting was done between a seller and a buyer consortium," he said.
"That created a mechanism for buyers to easily transfer quantities among themselves and provide to the seller a more stable offtake. There's no great innovation in that concept.
"It's reviving an old technique and applying it in the modern world. We think there is a lot of merit for sellers and buyers on that -- for the sellers it's great to have buyers with different demand profiles who are able to manage that offtake. And for the buyers we get some flexibility by aggregating a larger piece of demand."
-- Stuart Elliott, stuart.elliott@spglobal.com
-- Edited by Jonathan Fox, newsdesk@spglobal.com