Opening up: the effects of the Japanese gas market on the rest of Asia

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Gas market liberalization in Japan is helping pave the way for other countries in Asia to follow suit. More players means more liquidity, as the lines between buyers and sellers blur.

Demand growth in the global LNG market will hinge not only on new infrastructure and growing economies, but will also require an influx of additional buyers entering the market in search of clean, reliable and affordable energy.

Nowhere else is this more true than in Asia where steps have already been made to open up markets, add new participants and promote price discovery. However, demand prospects are very different in the established Northeast Asian market compared with the emerging economies in south and southeast Asia.

Competing fuels, energy efficiency and infrastructure constraints all play a role in dampening the outlook for demand in Northeast Asia. China, though, is set to continue to see strong LNG import demand growth given supportive government policy and could well overtake Japan as the world’s biggest LNG importer in the early-to- mid-2020s.

Other established buyers such as Pakistan, Bangladesh, India and Thailand will help prop up demand across the rest of Asia as they look to grow total power generation, industrial end-use and transportation demand while building out infrastructure to support LNG.

And emerging buyers elsewhere in Asia — countries such as Sri Lanka, Vietnam and the Philippines looking for a reliable source of energy supply to help support their growing economies and in some cases replace diminishing domestic supplies — will help fuel the next wave of LNG importers.

Legacy buyers

The traditional markets of Japan, South Korea, Taiwan and China represent over 55% of global LNG demand. But shifts in the profiles of these large buyers are likely in the coming years.

Japan, in particular, has traditionally been the driver of much of global LNG consumption, though the country’s recent market liberalization has prompted the relaxation of destination clauses in LNG supply contracts, revolutionizing the role of Japan as a traditional buyer.

With a steady rate in the return of the country’s nuclear fleet post- Fukushima over the next three years, Japan could also see a gradual reduction in its LNG imports.

Nine nuclear power plants have come back online as of 2019, with 14 more expected in the next few years, sparking a significant shift in demand away from the more expensive LNG.

As a result, S&P Global Platts Analytics estimates the issue of over-contracting to emerge this year among Japanese utilities, while the situation could peak in 2020, with the over-contracted volumes reaching 19.5 million mt.

While it used to be that Japan was heavily geared toward LNG supply security in a post-Fukushima world, now the buzzword is increasingly “flexibility” given its importance to dealing with downstream demand fluctuations amid growing fuel-on-fuel competition.

South Korea, meanwhile, shares a similar story to Japan, albeit with competition coming to a larger extent from coal and renewables.

Seoul wants by 2030 to increase the share of gas in its energy mix from 17% in 2017 to 19%, while the share of renewable energy is targeted to rise from just 5% to 20%. Coal, by contrast, is set to see its share of the country’s energy mix drop from 45% to 36% in the same timeframe.

Liberalizing the country’s gas market would mean allowing new and independent entrants to procure from the international market, while reducing the monopolistic power of state-owned Korea Gas Corp.

Opening up its receiving terminals to the downstream markets will also bring more price competitiveness. Despite the decision to cut LNG taxes by 74% and raise coal taxes concurrently by 27% from April 1, the economics of buying LNG versus coal in South Korea still seem to favor the latter, not least given that new power generation capacity in recent years has been focused on coal rather than gas.

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