When, in concluding an investigation last week, the Japan Fair Trade Commission ruled that there should no longer be restrictions to the resale of Liquefied Natural Gas (LNG) cargoes by Japanese companies, it made perhaps the biggest statement yet that the maturing of the LNG industry around a traded commodity model is at the point of no return.
As the world’s largest buyer (accounting for 83 million tonnes of total global net imports of 264 million tonnes in 2016), what Japan does in LNG matters. The historic model of LNG as a ‘floating pipeline’, with suppliers providing secure and largely inflexible gas to buyers on a long-term basis is disappearing before our eyes. Japan – which in valuing security of supply had historically sought assurances that contracted cargoes would be delivered to them and no-one else – is now recognising the value in its buyers being able to re-sell cargoes and fully evolve from buyers to traders.
The move is reminiscent of a similar decision by the EU in 2005 which ruled that in a free market, it was not legal to prevent buyers from reselling natural gas. It is also part of a gradual progression of liberalisation in the LNG market and reflective of the fact that the historic differentiation between buyers and sellers is eroding. Increasingly, everyone is a trader. With Japanese buyers (as well as those from many other countries) finding themselves long LNG over the next few years, being able to resell cargoes to alternative markets is imperative to avoid finding themselves in breach of take-or-pay commitments. That this move is a fundamental shift rather than a temporary adjustment, reflects the fact that we are on a one-way journey towards ever greater market liberalisation.
For Japanese buyers – and their suppliers – this could mean existing contracts having destination restrictions removed, and more portfolio management behaviour from traditional utilities. Major buyers such as JERA have been preparing for this change, and the presence of US LNG in their portfolio and those of others, already represents supply contracts with absolute freedom of destination.
How quickly LNG begins to resemble the oil market – with cargoes traded multiple times before being imported – remains to be seen. What is clear is that organisations will be rapidly evolving to be in a position to manage changing portfolios with different value drivers than for traditional long-term contracts. Leading ‘aggregators’ such as Shell have long-established portfolio management practices, and whilst it will not be appropriate for all organisations to build such capabilities, there will be a greater need than ever for traditional LNG buyers to change into something that resembles a trading organisation.
With oversupply of LNG projected for the next three to five years, margins will be slim and value-additive opportunities hard to come by, but establishing an organisation that is fit to manage the changing market and its challenging conditions will be imperative. The LNG world that emerges from this transitional period will be very different from the one we know today. It is an exciting time for those that have tracked this industry for the last decades and asked the eternal question of ‘whither commoditisation?’. We may be set to finally have an answer.
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