Reed Smith Client Alerts

This short note is to introduce two detailed papers that discuss the justification for the development of an Asian LNG reference price that is not benchmarked against the current ‘Japanese Crude Cocktail’ and suggests an approach to how that might be achieved. A short summary of the two papers is provided below.
LNG Tanks

As the market stands today, U.S. LNG prices tend to be set by reference to the price of natural gas at the Henry Hub, European LNG prices are usually set by reference to the price of natural gas at either the National Balancing Point in the UK or the Title Transfer Facility in the Netherlands and Asian LNG prices are typically set by reference to the price of the Japan Customs-cleared Crude (known as the ‘Japanese Crude Cocktail’ or JCC) .There are historic reasons for Asian LNG to be benchmarked against Japanese oil prices but these reasons no longer apply today. The question is, what alternative is there to enable the long-term purchase of LNG to be done on the basis of an effective and liquid index other than the JCC?

There are currently a number of measures of the Asian LNG spot price which could form the foundation for a forward reference price. The most well-known are the following indices published by various price reporting agencies (PRAs): (i) the Japan Korea Marker (JKM); (ii) the Argus Northeast Asia index; (iii) the Singapore SLInG (SLInG); and (iv) the RIM DES Japan LNG Assessment. It is estimated that currently 40 per cent of spot and short-term LNG contracts are priced off the JKM, as published daily by S&P Global Platts. However, these indices lack liquidity and/or are considered not very transparent.