2019 has been transformative for the Asia Pacific LNG market. Greater innovation, evolving business models, new structures and alternative approaches to risk management have all had a part to play in shaking up the world’s largest LNG market.
KEY THEMES OF CHANGE IN 2019:
More choice, more buyers
Asian buyers now have far more choice over LNG supply and pricing. Previously limited (largely) to JCC or Henry Hub, nowadays buyers can take their pick of JCC, HH, Brent, (non-HH) US gas hub, TTF, NBP, Spot (JKM)—all of which have come to the fore.
LNG pricing is much more nuanced than it used to be. Pricing structures have evolved so now we see buyers building price hedges into the same long-term agreements via multi-tiered structures.
The myriad of pricing indices have also continued to converge, meaning less arbitrage and lower levels of index-on-index risk. Spot prices have had a relatively flat year but 4Q has shown us so far that JKM is starting to rebound up to US$ 7+. So whilst we have seen a sustained, lower LNG price cycle throughout much of the year, LNG remains an increasingly attractive value proposition for buyers of all persuasions.
Price Reviews and Re-openers: “Reap what you sow?”
LNG pricing has always ebbed and flowed; it has cycled up and back down again. Whilst LNG may slowly but surely be ‘de-linking’ from crude pricing structures, we believe that (love them or hate them) we are headed for a new Price Review cycle, likely more aggressive and contentious than the last.
Expect to see more PR negotiations end in dispute, as long-term revenues and fundamental project economics are potentially at risk due to a perfect storm of long-term SPAs coming into their first PR period, older SPAs reaching later PR or extension periods and most crucially of all, downward prevailing pricing pressure (even geopolitical pressure) across Asia.
Onwards, Towards Liberalization!
Regulation was hot in 2019. Markets across Asia are looking inwards to promote greater and deeper levels of liberalization. As LNG accounts for a (sometimes) new and (mostly) larger share of the regional fuel mix, governments are focusing on how that shift translates into domestic energy prices in a way not seen before. Japan, for example, has quietly, but largely successfully, been working with the LNG customer community to implement the JFTC directives on anti-competitive practices. Other markets have promulgated open access regulations (including Third Party Access) to foster greater market access, including Malaysia, which in late 2019 imported its first TPA cargo.
We expect to see deeper regulatory reform and more comprehensive policy agendas in 2020.
Emerging markets: wherefore art thou?
With the notable exception of Bangladesh, a number of ‘emerging’ markets across South and South East Asia are taking a long time to ‘emerge’. Despite tantalizing signals from the market and extremely bullish import projections, suppliers wait expectantly for tangible movement in countries such as Vietnam, The Philippines, Myanmar and Sri Lanka.
Why so slow? For the most part, severe constraints still exist in relation to LNG infrastructure and regulatory and policy direction. Domestic agendas rage across Government and the NOC and SOE communities. Difficult questions need to be addressed around fuel cost pass-through, sovereign support and bankable finance structures. If ‘other Asia’, meaning non-JKT, China, possibly India, is to step up and account for a larger slice of the supply pie into Asia, more solutions will be required, urgently.
LNG Contracts: A New Generation?
Pro-forma industry MSPA?! Nearly, but not quite. A more standardized LNG SPA? Not so nearly. So is this a case of ‘plus ça change’ or are we genuinely seeing a new(er) generation of SPA and MSPA? Our view is the latter.
The LNG contract market is moving inexorably and irreversibly towards more open, flexible SPA terms. Volume. Operations. Credit. What once would have been considered unusual is now by and large the norm: volume tolerance, diversion rights, scheduling adjustments. The question is no longer whether to offer flexibility, it is how much to offer. And at what price. In the short term market, we are seeing a more standardized approach to MSPAs, including for spot, short and mid-term strip deals.
We expect the US second wave export projects (in particular) to have a significant impact on how we all contract for LNG.