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Energy and Natural Resources: Horizons

We are at an inflection point in the energy and natural resources industry. Across the world, we're facing change of every order; the question is - how do you deal with it?

The Asian LNG market diversifies

By Ian Gordon

Demand for liquefied natural gas (LNG) in Asia has traditionally been the province of a small number of North Asian countries — but this landscape has changed. New infrastructure technologies — like Floating Storage Regasification Units that are quicker and cheaper to build than traditional onshore receiving terminals — have allowed a raft of new players including Bangladesh, Pakistan, and Vietnam, to enter the market; meanwhile, traditional Asian producer countries have begun repositioning themselves as producer-buyers.

As the buyers' pool has diversified, so too has the sellers’. Pure LNG trading companies have emerged as middle men, and buyers — particularly North Asian companies unsure about future levels of domestic demand — have also entered the trading market. At the same time, sellers have moved away from traditional point-to-point sale to portfolio sales, opening up a greater opportunity for LNG trades. The number and nature of LNG sellers has itself diversified.

One factor behind these changes is the view taken by the EU and more recently the Japan Fair Trade Commission in relation to destination restrictions and similar provisions, which both bodies consider anti-competitive.

Moving forward, we should expect to see LNG sale and purchase agreements structured so as to allow more flexibility for trading — for instance, take-or-pay and seller shortfall clauses done on a cargo-by-cargo (rather than annual) basis, and greater diversion rights, even as more and more long-term agreements are entered into to support new production facilities required to meet predicted demand. This will result in much more complex agreements.

The plus side of these changes? More liquidity in LNG trading, and the market will support competition. The down side? There will likely be a lot more credit and reputational issues, as new buyers and sellers with less history and financial security enter the fray.

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