Japan nears creation of LNG futures market

05 June 2014  |  By: Ben Lefebvre

The Japan OTC Exchange (JOE) will unveil the country’s first LNG derivatives trading platform within the next month, even as the group is still trying to lock in possible participants, exchange director Kosuke Araki told ICIS in Tokyo on 27 May.

Creating the paper market would pave the way to Japan’s establishment of the world’s first LNG futures market in 2015. Japan, racked by some of the world’s highest LNG prices, hopes such a market will draw global interest and inject transparency into the commercial domain dominated by private contracts.

The US-dollar denominated swaps market is one of a group of initiatives the Japanese government is taking to limit the volatility of imported LNG costs.

The country’s Ministry of Economy, Trade and Industry (METI), which officially introduced the idea of an LNG futures market in April 2013, is also calling Japanese LNG buyers to form a consortium to negotiate for lower prices and domestic utilities to directly invest in foreign LNG projects. An LNG futures market would help stabilise LNG prices, METI stated in its April 2013 report.

Tokyo Electric (TEPCO), Chubu Electric and other Japanese utilities are currently paying $12.80/MMBTU for July-delivered LNG on the spot market, according to ICIS assessment.

“The establishment of such a market will develop the liquidity of LNG in the Asian region, so it may be preferable to buyers in Japan,” TEPCO representative Takuya Tanabe said on 2 June.

Chubu Electric in central Japan listed a host of possible benefits for LNG buyers. “We believe that the transactions will meet buyers’ desired conditions, including on volumes, timing, options, etc,” a Chubu spokesperson said on 4 June.

Utilities support trading platform

Japan’s utilities have supported the idea as a way to smooth out dramatic price fluctuations and better reflect market fundamentals than the system of all-private contracts currently in place, Tokyo Commodity Exchange (TOCOM) chief executive Mitsuhiro Onosato told ICIS on 27 May. At least five companies will have to participate in the market to make it practical, Onosato said.

“They need an open price benchmark, and they are interested in putting demand factors more clearly in the price,” he said.

Buying and selling LNG on an open platform would also benefit sellers such as Anglo-Dutch oil and gas major Shell and UK-based BP and others by minimising the time they need to market LNG cargos available for the spot market, Onosato added.

Ginga Energy Japan, a subsidiary of Singapore-based energy broking firm Ginga Petroleum, is working with JOE to convince companies to join the exchange.

LNG – not liquid enough?

LNG sellers, however, have been less optimistic about the market’s success. LNG traders in Tokyo speaking off the record with ICIS have described the idea of an LNG swaps and futures market as a government initiative with little support outside the utilities.

The market’s success or failure would have little effect on overall business, a source in one Japanese trading company said on 4 June. One potential hurdle that sellers, traders and analysts ICIS interviewed have flagged is liquidity. JOE has set the minimum LNG swap contract at 250,000 MMBtu, a large amount that might keep trading activity sparse.

The spot LNG market can already be slow moving, with only a handful of sales contracted each month. Another liquidity fear is that Japan’s energy infrastructure, with pipelines and terminals mostly owned by the individual companies, is not open enough to allow the necessary trading in physical LNG.

“The futures market only works if its backed up by a physical market,” Steven Miles, LNG analyst at US law firm Baker Botts, said on 27 May.

“Sometimes you have to take delivery. How does that happen in Japan? You don’t have open access LNG delivery terminals - they’re proprietary terminals.”

Although no one ICIS talked to in the market doubted that Japan would succeed in launching the swaps and futures market, its ultimate success is still up for question, Eurasia Group analyst Leslie Palti-Guzman told ICIS on 27 May.

“It’s potentially a solution for supplying a pricing benchmark until a real Asian hub emerges,” she said.

 

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