On March 11, 2011, a magnitude 9.0 earthquake and tsunami devastated a large portion of Japan’s eastern coastline killing nearly 16,000 people and causing infrastructure damage estimated at more than $225 billion. The consequent nuclear disaster at the Fukushima Power Plant ultimately resulted in the closure of all of Japan’s nearly 50 nuclear reactors.
In a move to compensate for lost electric generation capacity, Japanese imports of LNG jumped nearly 23% to 86.7 million mt during the 2012-2013 fiscal year, up from imports that totaled 70.6 million mt during the fiscal year just prior to the disaster.
The precipitous jump in demand for LNG from post-Fukushima Japan changed the global gas market irrevocably. Since March 2011, spot Asian gas prices have averaged roughly $15.65/MMBtu compared to prices that trended around $7.00/MMBtu during the two-year period from 2009-2011.
More notably, the Fukushima disaster accelerated a trend toward continental gas price divergence that was already emerging by late 2010. During that year, Asian gas prices averaged a premium of $1.30/MMBtu over hub prices in Europe, the second largest LNG consumer region by volume behind Asia. Since March 2011, the spread between spot Asian gas prices and the UK National Balancing Point has averaged more than $6.00/MMBtu.
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Over the same period, the regional gas price spread between Asia and Europe has followed a reliable trend reflecting periods of strong demand in the Asian market. During periods of strong demand from major consumers such as Japan, South Korea and China, the Asian price premium has gone over $10.00/MMBtu. In periods of weaker demand from the major Asian consumers, the price spread between Asia and Europe has narrowed to less than $2.50/MMBtu.
In an environment where producers and consumers use increasingly complex hedging instruments such as futures, forwards and swaps contracts to ensure profitability, the Asian-European price spread can provide a reasonably accurate prediction of Asian spot gas prices in the future. Of course, this requires an equally accurate picture of global supply and demand fundamentals.
Over the last year some of the largest and most well-recognized consulting and analysis firms have predicted that global demand for LNG will outpace liquefaction capacity through the end of the decade. If those predictions are correct, Asian spot gas prices are likely to average somewhere between a $6-8/MMBtu premium to European hub prices.
Using NBP forward curves and futures prices, this give us a good idea of where future prices in the Asia market will be in in the near to medium term. Of course, there are some caveats that should be noted.
First, the recent announcement that an LNG import terminal will be inaugurated in Lithuania by December demonstrates Europe’s resolve to diversify away from Russian gas supply. The possibility of increasing demand for LNG at European hubs in the UK, the Netherlands, Belgium, France and Spain could significantly alter the historic Asian-European price spread as Europe looks to improve its security of supply and diversify away from Russian pipeline gas.
Secondly, with the start of US gas exports in 2015, it remains to be seen how much of North America’s non-contracted supply will end up in the European market. While it’s widely expected that most US exports will be sent to Asia, increased supply of US LNG to Europe could depress onshore gas prices, ultimately changing the historic Asian-European price spread.
Regardless of how these events impact the global market for LNG, it’s clear that regional gas price spreads are likely to persist for some time. Paying attention to these spreads offers a reasonable strategy for both consumers and producers to minimize risk and ensure profitability in the relatively illiquid and volatile market for liquefied natural gas.