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An LNG terminal of the Korea Gas Corporation (KOGAS) in Manzanillo

An agreement toward cooperation on liquefied natural gas (LNG) imports by South Korea, Japan, and China – which together account for more than half the world’s demand for the fuel – has observers watching to see whether international LNG supply and consumption may yet become a “buyer’s market.”

Demand for LNG has been skyrocketing recently with South Korea, China, and Japan all adopting policies of transitioning toward more environmentally friendly energy sources.

In a joint statement following their trilateral summit in Tokyo on May 9, South Korean President Moon Jae-in, Japanese Prime Minister Shinzo Abe and Chinese Premier Li Keqiang said the three sides had agreed to “jointly pursue cooperation on LNG.” The same day, the three sides’ industry-related ministers also reportedly signed a memorandum of understanding (MOU) on LNG cooperation.

The agreement by the three Northeast Asian powers to collaborate toward “greater fluidity and fairness” in the LNG market effectively translates into joint efforts to lower international prices for LNG adoption.

According the British energy research and consulting group Wood Mackenzie, the three sides accounted for a total of 54.6 percent of the world’s LNG imports as of 2017: Japan at 28.6 percent with 83.7 million tons, China at 13.1 percent with 38.4 million tons, and South Korea at 12.9 percent with 37.8 million tons.

But with the international LNG sales and demand market centering on suppliers, the three Northeast Asian economies are at a disadvantage in negotiating prices as the world’s biggest LNG importers. Major LNG producers and sellers include Qatar (76.7 million tons in 2017), Australia (53.8 million tons), Malaysia, Russia, the US (all 13 million tons), and Canada.

The MOU signs that the three Northeast Asian economies plan to cooperate jointly on transforming the seller-centered international LNG market into one where “buyer power” plays a role.

“Disadvantageous conditions have become a matter of course for the Korea Gas Corporation (KOGAS) when it signs LNG contracts with overseas suppliers, including designations of and restrictions to certain destinations (ports), bans on resale, and the requirement of transaction costs for volumes that are not actually delivered,” a Ministry of Trade, Industry and Official (MOTIE) senior official said.

“This [MOU] signals that the three sides will cooperating to amend that,” the official explained.

Import prices for LNG also vary periodically over the roughly 20-day period that LNG volumes are being transported on KOGAS-owned vessels. The market landscape is poised to change if KOGAS is able to reroute the shipments to third locations in reflection of changing domestic LNG supply and demand conditions or resell purchased volumes at a higher price to other places. The ability of buyers to wield greater power would give them an advantage in price and volume contracts, while more affordable prices could lead to lower domestic LNG city gas charges.

Japan, the world’s top-ranked LNG importer, mainly imports the fuel for use in eco-friendly power generation and cooking. South Korea’s LNG demand has risen sharply amid a shift in energy approaches from coal-fired power generation to more eco-friendly combined cycle power generation. China, which faces issues of environmental pollution, has seen an explosive rise in LNG volumes since last year as coal-fired power plants have been replaced with the new fuel.

LNG prices tend to rise or fall with recent fluctuations in the average price of crude oil. Unlike with crude oil, however, there is no specific international transaction market for LNG like Dubai. It’s an insular, behind-the-scenes market where prices and volumes are set through bilateral discussions between sellers and importers and contracts are concluded through connections.

No official price index exists for the market in long-term contracts, which are often signed in increments of 20 years. Short-term spot prices are provided by Japan’s Platts JKM, with an early May total of US$8.07 per MMBtu (a unit of volume for natural gas).

“In the past, we’ve had to accept unfavorable contract conditions because LNG supplies fell short of import demand,” a MOTIE senior official explained.

“But with the US’s shale natural gas supplies increasing by the day, there’s increasingly a new market structure of aggressive competition among international LNG sellers,” the official said.

Meanwhile, South Korean Minister of Trade, Industry and Energy Paik Un-gyu discussed the building of a Northeast Asian “supergrid” for new and renewable energy sources in a May 8 meeting in Tokyo with Japanese Economy, Trade and Industry Minister Hiroshige Seko.

The supergrid project is one where the power grids in China, Mongolia, Russia, Japan, and South Korea would be connected to allow shared use of electricity produced through solar and wind power and clean LNG. President Moon Jae-in proposed the effort at the Eastern Economic Forum in Russia last September for the shared use of clean energy in Northeast Asia.

“The supergrid is significant in mitigating the issue of unreliability with new and renewable energies, where power output varies greatly according to weather and climate conditions, and in laying the groundwork for peace and cooperation within the region through the building of Northeast Asian power grid infrastructure,” MOTIE said.

By Cho Kye-wan, staff writer

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