Asian LNG Research Articles

Session 26. Oral Presentation for: Neighbourhood watch: the future of Asian LNG demand growth

Session 26. Oral Presentation for: Neighbourhood watch: the future of Asian LNG demand growth

Estimating the Optimal Hedge Ratio and the Hedge Effectiveness of LNG Contracts in Asia

Purpose This study examines the effectiveness of hedging Japan/Korea Marker (JKM) markets by estimating the optimal minimum variance hedge ratio with various models. Design/Methodology/Approach In this study, the LNG Japan/Korea Marker (JKM), which is published by Platts, was used over the period of January 02, 2014 to July 12, 2019. Both constant and dynamic hedge ratios were found using various methods including OLS, VECM, BEKK-GARCH, and the MRS model. Estimated hedge ratios through an out-of-sample analysis were evaluated through hedge effectiveness (HE). Findings Basically, the empirical results indicate that hedging effectiveness seems low in both the in-sample and out-of-sample periods. The OLS model slightly outperforms time-variant models, but generally there is no significant gap between models. It is worth noting that although OLS, VECM and BEKK-GARCH models hold relatively stable outcomes in both horizons, the MRS model experiences a large gap between 14.85% and 5.90%. Research Implications The results do not show a high hedging effectiveness for several reasons. However, considering most of studies on this issue focus on popular gas indices such as NBP, TTF and HH, this study makes a valuable contribution to the research of Asian LNG markets by comparing various hedging models for the first time.

Price review arbitration in the Asian LNG markets—‘‘The times they are a-changin’’

Abstract This article will focus on price review clauses in Asian LNG markets from the point of view of price review arbitration and the jurisdiction of the tribunal. The basic conclusion reach is that there is no simple answer but that various considerations speak in favour of establishing the jurisdiction of arbitral tribunals in respect of gas prices. The background to the article is a number of gas price arbitrations that have been initiated in Asian markets and the assumption that these early cases will be followed by many more. One of the questions raised in this context is jurisdiction of the tribunal.

Energy market financialization: Empirical evidence and implications from East Asian LNG markets

In the process of transferring from oil indexation to competitive pricing for natural gas, the number of potential gas trading hubs that underpin the competitive prices is a key question, but lack of empirical investigations. This study employs a Structure Vector Auto-regression model (SVAR) and monthly LNG price data of four East Asian importers to examine whether the natural gas markets are integrated among them. The study finds that LNG markets are fragmented in East Asia. The results suggest that there should be multiple LNG benchmark trading hubs at the time being so that each hub could reflect different fundamentals.

Impacts of an Ice-Free Northeast Passage on LNG Trading: Transport Routes and Optimal Capacity Planning

We analyze the significance of an ice-free Northeast Passage (NEP) as a shipping route for LNG, and the impacts on alternative transport routes and -capacities. The following aspects are considered: (1) Trends in LNG production, particularly in the Russian Arctic; (2) Developments in the Asian LNG consumer market; (3) Specifics and prospects of Arctic shipping. The major LNG trade flows between producers and the Asian consumer market are modeled. Methods from Operations Research are contrasted and the Cycle-Cancelling Algorithm applied to the transportation problem, in order to achieve a cost-optimal capacity allocation. The impacts of demand variations and a chokepoint shutdown on transport routes and -capacities are considered. Concepts from competition theory are used to model the effects on LNG pricing. The key finding is that an ice-free NEP is highly relevant for shipping activities of Russian LNG producers. It constitutes a competitive advantage and notably impacts the supply competition and pricing on the Asian LNG market. A discussion of results and a conclusion critically reflect upon the research undertaken, providing an outlook and suggestions for future research.

Investigating the price linkage between the Asian LNG spot and East Asian LNG prices and its implications

This study investigates the price linkages among the Asian LNG spot and East Asian LNG prices to examine the existence of a long run relationship among the spot, Japanese, South Korean, Taiwanese, and Chinese LNG prices using co-integration analysis over the 2009-2014 period. The results show that the Asian LNG spot price did not have a price linkage with both monthly averages of Japanese and Taiwanese LNG prices. The analyses also indicated that the South Korean LNG market moved together with the Asian LNG spot market. Lastly, the study discovered that the Chinese LNG market was somewhat influenced by the dynamics of the Asian LNG spot market. The findings corroborate the International Energy Agency's views on the importance of creating a natural gas trading hub in Asia that reflects the dynamics of the gas market in the Asia Pacific Basin and making the Asian gas market to become more uniform.

Investigating the price linkage between the Asian LNG spot and East Asian LNG prices and its implications

Investigating the price linkage between the Asian LNG spot and East Asian LNG prices and its implications

Lower oil and gas prices and the changing LNG landscape

The recent uptick in oil prices from multi-year lows reflects growing anticipation of a tightening of supply and demand fundamentals in global oil markets. Price recovery is expected to come through most notably in the second half of 2016, as the extended period of low oil prices takes its toll on global oil supply growth, and oil demand growth holds up as prices recover. Rising oil prices will eventually flow through to higher realised LNG revenues in Australasia's long-term oil-linked term contracts. This would provide welcome respite to project economics, many of which have been hit hard by cost escalation and schedule overruns throughout the build phase, and compounded by the collapse in oil price just as these were starting up. But even with a more favourable oil price environment, the outlook for LNG prices remains weak in the medium term. Lower Asian LNG demand growth and an impending wave of new LNG supply raises the potential for an over-supplied market. With spot prices low, Asian LNG contracts may come under pressure from over-contracted customers. Demands for volume rescheduling and price reductions could become more common. With demand growth less than anticipated, and faced by competition from new entrants, buyers could look to place excess LNG into the international market. They risk competing for market with sellers, trying to secure customers for their own LNG while cutting costs through optimisation. These changes are forcing all companies to consider the benefits of a portfolio approach to their business. These dynamics, in light of low commodity prices, and the implications for the industry are considered in this extended abstract.

동적 계획법을 이용한 LNG 현물시장에서의 포트폴리오 구성방법

Among many energy resources, natural gas has recently received a remarkable amount of attention, particularly from the electrical generation industry. This is in part due to increasing shale gas production, providing an environment-friendly fossil fuel, and high risk of nuclear power. Because South Korea, the world`s second largest LNG importing nation after Japan, has no international natural gas pipelines and relies on imports in the form of LNG, the natural gas has been traditionally procured by long term LNG contracts at relatively high price. Thus, there is a need of developing an Asian LNG trading hub, where LNG can be traded at more competitive spot prices. In a natural gas spot market, the amount of natural gas to be bought should be carefully determined considering a limited storage capacity and future pricing dynamics. In this work, the problem to find the optimal amount of natural gas in a spot market is formulated as a Markov decision process (MDP) in risk neutral environment and the optimal base stock policy which depends on a stage and price is established. Taking into account price and demand uncertainties, the basestock target levels are simply approximated from dynamic programming. The simulation results show that the basestock policy can be one of effective ways for procurement of LNG in a spot market.

Global Gas — Oversupply and Uncertain Future

SHOULD GAS STAY AT HOME? As recently as 2005-2007, North America was seen as threatened by major and enduring gas shortage. Prices were expected to stay as high as, or exceed present European gas import prices, typically $10 $12 per million BTU (July 2013) for pipeline gas, and often more than that for LNG imports. Asian LNG gas import prices for certain markets, especially Japan, can presently attain more than $15 per million BTU pricing this energy at close to $35 per 1000 kWh (MWh). Electricity produced from gas at this price will have a generating-fuel-only cost of around or above $70 per 1000 kWh. For September delivery, early August prices of US natural gas contracts traded on the Nymex are currently priced around $3.45 per million BTU. In 2005-2007 major investment was underway in the US to build terminals to import LNG, not to ship it overseas. Today, converting import terminals into export terminals, and building new LNG export terminals at typical costs ranging from $10 to $20 billion each, is the major planned or projected gas infrastructure program underway in the US and Canada. Due to the turnaround being recent, the high costs, and regulatory requirements including energy policy and environmental concerns, the US government has to date only approved two projects for LNG exports. Debate rages in Washington over whether to allow more, with calls for no or low exports from the USA coming from consumer groups and major industrial gas and energy users, such as Dow Chemical, who say the gas should stay on the continent to ensure cheap energy for domestic manufacturing and consumers.