Platts JKM and its growing relevance in spot contracts

Transcription

1 MARKET ISSUE Platts JKM and its growing relevance in spot contracts February 212 By Hong Chou Hui, Managing Editor, Asia LNG, Platts

2 Platts daily Asia spot LNG price assessment, the Japan Korea Marker, is used as the outright pricing basis for up to 4% of spot LNG deals in the region. About 2-4% of Asian spot LNG deals are now priced off Platts JKM assessment, and if the JKM is used for spot deals, they are priced directly to the JKM rather than in combination with other assessments, according to a prominent industry energy lawyer. Platts launched the JKM, which assesses the delivered price of spot LNG to Japan or South Korea on a daily basis, on February 2, 29. The two north Asian nations combined bought almost half of the world s total LNG of 221 million metric tons [mt] in 21, with Japan buying more than 3% [7 million mt] while South Korea purchased around 1% [33 million mt]. Market observers estimate that spot LNG deals make up 2% of LNG volumes produced each year. This trade includes bilateral deals, inter-regional diversions, tenders, chained cargoes and a variety of other transactions. As much as 4 million mt of LNG, equivalent to 7 cargoes a year, is being traded on spot basis. The remaining volume of 8% is transacted under long-term contracts that typically run from 1 to 3 years. In other energy commodity markets such as crude oil and naphtha, spot trades typically make up about 1% of the total volumes transacted. Before Platts started assessing the JKM, there were reported spot trades conducted at prices as high as $2/MMBtu in the market at the end of 28, representing a significant premium over oil-linked term contract prices of $1/MMBtu for shipments sent to Japan at the same time. Long-term LNG contracts in Asia have traditionally been priced against oil, with many in the last few years yielding a delivered LNG price at about 1% of the JCC crude oil price. JKM vs Japan Algeria customs Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 JKM vs Korea Algeria customs Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 MARKET ISSUES: Natural Gas 2

3 JKM vs Taiwan UAE customs Russia customs Egypt customs Spain customs Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 The JKM was thus launched to serve an unfulfilled segment of the LNG market that did not have a clearly defined pricing mechanism, while providing market participants with an index that would allow them to trade LNG shipments at prices based purely on the fundamentals of the LNG market. The new index enabled the nascent spot LNG market to break away from the industry s long-established links to oil production and prices that arguably are no longer relevant to LNG. The JKM began to gain traction in 21 when Taiwan s CPC awarded some spot buy tenders for cargoes delivered across summer at prices matching or close to the JKM values for the same month of delivery. PLATTS JKM: MATCHING ASSESSMENTS TO MARKET PRICES In Japan: Platts assesses the JKM for physical LNG cargoes delivered to Japan and South Korea in the third, fourth and fifth half-month cycles forward from the date of trade. On January 3, the first working day of 212, Platts assessed cargoes for delivery in H1 February, H2 February and H1 March, with the Platts JKM marker assessment being the average of the two half-month cycles that comprise the first full month of delivery. On January 3, the JKM month assessed was February 212. Japan s customs releases data of LNG imports almost three months after Platts completes the assessment for a particular month. In the example of February 212, Japanese customs will publish the data for LNG shipments delivered to Japan at the end of March. Platts assessed the February JKM from December 16, 211 through January 1, and then rolled over to the March JKM on January 16. An analysis of Platts JKM spot monthly average assessments and Japan customs data for the past three years showed a high correlation of spot cargo prices matching the published JKM values for the same month of delivery. Prices of spot cargoes from Peru, Yemen, Trinidad & Tobago, Algeria, and Norway coincided closely to Platts JKM values for the same physical month of delivery. The LNG producers of Peru LNG, Yemen LNG, Atlantic LNG in Trinidad, Norway s Snohvit LNG and Algeria s Sonatrach do not have any term contracts with Japanese buyers, limiting their commercial opportunities to the spot market. Nigeria LNG has offtakers such as BG and Shell who have term contracts with Japanese buyers, but the project had several spot sell tenders in 211 for cargoes that were originally meant for delivery to Atlantic destinations. Japan lost 12 gigawatts of nuclear power in the aftermath of the March 211 Fukushima crisis and replaced this with gas-fired thermal capacity, resulting in additional spot demand of 1 cargoes every month. Some nuclear plants located close to earthquake fault lines were shut down from June 211, while facilities that were shut for maintenance pre-crisis were not allowed to restart due to safety concerns, leaving Japan with GW, or 16.3% of the country total installed nuclear capacity of GW at 4 reactors by the end of 211. Even as power generation demand for LNG increased in Japan, the JKM commanded a premium of more than $8/MMBtu over UK National Balancing Point gas hub prices on several occasions. As a result, Japanese buyers were able to purchase spot cargoes from Nigeria at or close to the JKM values for the same month of delivery. Japan also bought spot cargoes from its term LNG suppliers in Russia, Qatar, Indonesia and Australia, but these were not considered for the purpose of this paper as the spot prices and shipments were mingled within the larger contract volumes and values. MARKET ISSUES: Natural Gas 3

4 JKM vs China 2 Oman customs 1 Egypt customs Russian customs Belgium customs UAE customs 1 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 In South Korea: An analysis of Platts JKM spot monthly average assessments and South Korean customs data from late 29 through end 211 similarly revealed a high incidence of spot cargo prices matching the published JKM values for the same month of delivery. South Korea s customs publishes the data for imported LNG cargoes two months after Platts completes the assessment for a particular month of delivery. Prices of 28 spot cargoes from Nigeria, the US, Algeria, Peru and Norway mostly matched Platts JKM values for the same physical month of delivery. The LNG producers of Nigeria LNG, Peru LNG, Norway s Snohvit LNG and Algeria s Sonatrach do not have any term contracts with South Korean buyers Korea Gas Corporation, POSCO, SK E&S and GS Caltex limiting their commercial opportunities to the spot market. Five reloaded LNG cargoes from Louisiana s Sabine Pass terminal in the US were delivered to South Korea at or close to the JKM values for the same month of delivery. Spot LNG buying activity from South Korea was especially intensive during the winter months of late 29 and early 21 with 13 cargoes from Nigeria, the US, Peru and Norway delivered to the country, as freezing temperatures swept across north Asia. This was repeated during the winter of late 21 and early 211, when South Korean buyers purchased several spot cargoes from Nigeria, the US, Peru and Norway matching the JKM values for the same month of delivery. The Nigerian cargoes sent to South Korea in November 21 and February 211 at $9.2/MMBtu and $9.84/MMBtu respectively were virtually an exact match of the assessed JKM of $9.2/MMBtu and $9.8/MMBtu for the same periods. In December 21, South Korea received a Norwegian cargo at $9.49/ MMBtu, priced only slightly below the December average JKM assessment of $9./MMBtu. In Taiwan and China: Platts includes a 1 cent/mmbtu freight discount from the JKM for cargoes delivered to Taiwan and China, as both countries are slightly closer to producer nations in southeast Asia, the Middle East and Australia. Despite this freight discount, Taiwan and China s buyers have paid prices close to or matching the JKM over the past three years to secure shipments. Taiwan [%] and China [4%] together accounted for purchases of almost another 2 million mt of the world s LNG supply in 21. Taiwan s customs publishes its LNG import data two months after Platts completes the assessment for a particular month of delivery, while China releases the same information three months later. Taiwan s CPC issued several buy tenders for more than a dozen cargoes delivered across the summer months of April through August 21. Customs data from the country revealed that cargoes from Trinidad & Tobago, Russia, the United Arab Emirates and Norway were transacted at or close to Platts JKM values for the same physical month of delivery. Prior to the country s peak summer demand of 21, CPC bought two Russian cargoes delivered in October and November 29 at prices of $.14/MMBtu and $.43/MMBtu respectively, lining up with Platts JKM monthly average values of $.13/MMBtu and $.39/MMBtu for the same periods. China imported several cargoes across a three-year period from the UAE, Peru, Belgium, Russia, the US and Oman at values matching or close to Platts JKM values for the same physical month of delivery. The country s two state-owned buyers, China National Offshore Oil Corporation and PetroChina, both do not have long-term supply MARKET ISSUES: Natural Gas 4

5 contracts with the LNG producers of the UAE s ADGAS, Peru LNG, Oman s Oman LNG and Qalhat LNG projects, and Russia s Sakhalin 2 facility. Two reloaded spot LNG cargoes from Louisiana s Sabine Pass terminal in the US and one reloaded spot shipment from Belgium s Zeebrugge terminal were sold to China. USE OF THE JKM IN FINANCIAL TRANSACTIONS Platts JKM continues to gain traction in spot LNG trades. The first financial LNG swap settled against the JKM was done by CitiBank, with an international oil major in January 211. Several more such JKM swaps have been concluded by Citi with various other counterparties since. The LNG swaps have been transacted using small parcels in the range of 1, to, million British thermal units, or MMBtu. A full-sized LNG cargo has 3. million MMBtu. Besides north Asia, the JKM has had an impact on spot prices in India, which bought around % [11 million mt] of the world s LNG in 21. Before Platts launched the DES West India assessment on August 1, 211, buyers and sellers in India would typically apply a discount of around $2/MMBtu to the JKM for their spot LNG transactions. JKM monthly average Source: Platts February April June August An upcoming liquefaction project, which would serve Asia, would price all its commissioning cargoes directly to the JKM, according to the same industry energy lawyer. Two new LNG liquefaction projects are coming online in 212 Angola LNG s.3 million mt/year facility and Woodside Petroleum s 4.8 million mt/year Pluto project in western Australia. --Hong Chou Hui, chou_hui_hong@platts.com October December For more information, please contact the Platts sales office nearest you: Web support@platts.com North America EMEA Latin America Asia-Pacific Russia +1-8-PLATTS8 (toll-free) +44-() (direct) 212 Platts, a Division of The McGraw-Hill Companies, Inc. Reproduction of this publication in any form is prohibited except with the written permission of Platts. Because of the possibility of human or mechanical error by Platts sources, Platts does not guarantee the accuracy, adequacy, completeness, or availability of any Platts information and is not responsible for any errors or omissions or for the use of such Platts information. Platts gives no express or implied warranties, including, but not limited to, any implied warranties of merchantability or fitness for a particular purpose or use. In no event shall Platts be liable for any direct, indirect, special, or consequential damages in connection with subscribers or others use of this publication.