Wood Mackenzie reported Monday that policy and regulatory uncertainty in Japan and South Korea could result in less new liquefied natural gas (LNG) supply being developed, forcing continued tightness in the Pacific LNG market beyond 2020 and perpetuating relatively high spot prices. This is contrary to general market consensus that the market will see relief around the 2018 timeframe. While the governments of Japan and South Korea are actively promoting greater competition between new LNG suppliers to encourage lower priced LNG, uncertainty regarding nuclear generation and market liberalization may have the opposite effect and increase the cost of LNG procurement.
Japan and South Korea combined currently account for over 50 percent of global LNG demand. Uncertain of their future LNG demand requirements cautious incumbents in Japan and South Korea are buying only the LNG they are assured they will need, while new entrants in the gas and power markets are seeking regulatory clarity before committing to off-take.
Wood Mackenzie's Head of Asia Pacific Gas & Power Analysis, Gavin Thompson says, "Both governments recognize their influence on the global LNG market and are actively pursuing initiatives aimed at reducing overall LNG supply costs through increasing competition between global LNG suppliers. However, a lack of clarity around the timing and extent of market liberalization as well as ongoing uncertainty around nuclear power in their domestic markets could have the opposite effect."
Thompson elaborates, "Power market liberalization could erode the regional monopolies of traditional power utilities and enable other players such as gas utilities, industrials and downstream companies to enter the market. Uncertainty about the future regulatory and competitive environment could result in all players delaying firm LNG procurement decisions."
Similarly in South Korea, gas market liberalization, contract renegotiations and the potential for new entrants able to procure LNG at prices below the weighted average supply cost of Kogas (Korea Gas Corporation) is restricting the company’s ability to procure new long-term LNG supply. Furthermore, optimistic government expectations on future coal and nuclear generation build, amongst other issues, consistently under-estimates the country's actual LNG requirements.
Wood Mackenzie forecasts Japan and South Korea's requirement for incremental LNG, in addition to that already contracted, at over 30 million tons per annum (mtpa) in 2020 but can identify only a small portion of incremental LNG presently being procured. Thompson says, "The appetite for firm LNG procurement is lower compared to the demand outlook. This likely shortfall will need to be met by the spot market, Qatar or portfolio players. Portfolio players are particularly interesting as it is possible that existing and emerging portfolio players, some of them Chinese and Indian, start going long on LNG to secure market. This would introduce greater liquidity to the market, overcome the procurement shortfall from Japan and South Korea and drive spot prices down. But it is not yet clear whether portfolio players are willing to do that."
Concluding, Thompson says, "The governments of Japan and South Korea are rightfully looking to reduce overall energy costs to maintain competitiveness within their broader economies. However, the uncertainty that these policies have introduced could be counter-productive. Projects need some security of contracted volumes in order to be assured of commercial viability. Without this security, these projects will not be developed in line with market demand. The wave of supply expected to come online around 2018 will likely be delayed as a result, and risk LNG procurement costs rising. While portfolio players could aggressively launch new supply to fill this gap, potentially pushing down Pacific spot prices, it is not yet clear how much volume risk portfolio players are willing to take."
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