December 13, 2013

The Unlikelihood of an Asian LNG Buyers’ Club

By Joel Smith

Five of the six largest liquefied natural gas (LNG) importers in the world, Japan, South Korea, Taiwan, China and India, gathered last week in New Delhi for an exclusive meeting—no suppliers allowed—in which they discussed ways to secure cheaper LNG. In a separate meeting also held last week in New Delhi, representatives from Japan and India announced the two countries are moving forward in developing plans to jointly purchase LNG. Despite these attempts, it is unlikely that an Asian "buyers' club" will achieve its goal of reducing prices through collective action.

The drive to create such a buyers’ club in Asia is perhaps not surprising. According to BP, the region accounted for 70 percent of global LNG imports in 2012. Japan alone accounts for over one-third of global imports. In addition to their overwhelming share of global LNG market imports, Asian consumers pay substantially higher costs for natural gas relative to other parts of the world. Consumers in the region now pay roughly 2 times the European rate for natural gas and 4 times the U.S. rate.

Developing Asian countries aggressively seek access to energy—in all its hydrocarbon and renewable forms—to maintain economic competitiveness. Environmental factors are considerations driving the demand for LNG in some countries. The March 2011 Fukushima crisis in Japan and a scandal raising suspicion on the safety of nuclear power earlier this year in South Korea pushed these two countries to rely more heavily on conventional hydrocarbon imports for power generation. The region’s demand for LNG—as well as crude oil—leaves little leverage for buyers to dictate terms under current arrangements.

With Asian consumers expecting natural gas to represent a growing portion of energy mix in the region, importers are placing big bets on LNG. For instance, China and India have both invested in large expansions of infrastructure to grow LNG import capacity over the next few years. Additionally, Japanese shippers have announced plans to procure 90 new LNG tankers by 2020 with a hefty price tag of $18 billion. Many Asian consumers also own stakes in production and export facility projects in natural gas producing countries. Asian LNG consumers are heavily invested throughout the LNG supply chain.

Given high prices and the large volumes consumers import, it is no wonder these countries are seeking to develop a buyers’ club. However, Asian LNG consumers are likely to be disappointed as a potential buyers’ club faces considerable challenges to holding any sway over the prices its consumers pay for LNG.

Asia’s LNG market is expected to be tight in the near- to medium-term as Asian demand for the fuel remains strong. Analysts from RBC Capital Markets project the region will account for 64 percent of global LNG demand by 2020. The speed at which new LNG export projects are brought online in places like Australia, Canada, Russia and United States—in addition to places like Tanzania and Mozambique further into the future—will be a major factor in determining the makeup of LNG supply available to Asian markets. This is largely out of the hands of Asian consumers, even despite their investments in the LNG supply chain.

The effectiveness of a buyers’ club is determined by the level of shared interest and ability to marshal collective demands and action. Asian LNG importers  come to the table with different needs. As a Reuters analyst recently remarked, “It’s hard to see disparate companies in countries with different business cultures and different energy supply/security needs finding enough common ground to present an effective united front to sellers.”

Despite tremendous demand for LNG in Asia, consumers have choices regarding energy inputs. Natural gas is largely used as a fuel for power generation, but it is not the only one. It competes with coal, oil, nuclear, hydroelectric and other renewable inputs. For Japan and South Korea, determinations on the future of nuclear power will weigh heavily on future demand for LNG in these two countries. China, which generates 65 percent of its power from coal and has substantial coal reserves, is trying to make a shift to greater natural gas use. But LNG is not its only option, as it has major interests in imports via pipeline from Myanmar, Central Asia and potentially Russia.

The energy future of these large Asian energy consumers is not solely tied to the prospects of LNG. These countries represent a diversity of  energy needs, have different approaches to fuel supply, and foresee different portfolios of energy sources. As such, the attempts of an LNG buyers’ club to exact concessions from suppliers will be weakened by the diverse energy needs and approaches to fuel supply of the Asian consumers. The availability of alternatives and the diversity of supply chains will prevent these consumer nations from compelling a lower gas price, even despite the strong market share for which they account. 

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