Ministers from Japan and India meeting in Tokyo Monday agreed for the liquefied natural gas (LNG)-consuming countries to work together to secure what they believe would be more equitable pricing for supplies.

“Japan and India, as major LNG consuming countries in Asia, will work together towards the development of a market environment that would enable effective, stable and globally competitive LNG procurement. Forming a transparent and globally competitive LNG price in the Asia Pacific market serves the common interests of Japan and India,” said India’s M.Veerappa Moily, minister of petroleum and natural gas; and Japan’s Toshimitsu Motegi, minister for economy, trade and industry, in a joint statement.

LNG has long been sold to Asian markets under long-term contracts with prices indexed to the price of oil. This has yielded LNG prices paid by Asian countries that are substantially higher than those in Europe and North America. While some recent contracts for supply from proposed U.S. Gulf Coast terminals have broken with this practice, developers of export projects in Western Canada have said oil-indexed pricing is necessary to make projects economic (see Daily GPI, Sept. 6).

“Even as the position of natural gas as an alternative fuel for oil is fading and the rationality for such price formation is less clear compared to past, the majority of LNG contracts in the Asia Pacific market are long-term with a pricing formula that is linked to the oil price,” the ministers said. “Since the prices of individual contracts signed on a bilateral basis are confidential, there are no reliable price indices that accurately reflect the LNG supply and demand balance in the region at this point.”

Further, many existing contracts lack flexibility in areas such as cargo destination, which adds to the lack of liquidity in Asian markets, they said.

“Procuring LNG from more diversified suppliers and/or regions will lead to the increase of market connectivity and price convergence among regions, which should result in more competitive pricing of LNG,” they said. “…In order to further share the analysis and best practices from multiple initiatives and studies on LNG markets today, Japan and India support the launch of a Multilateral Joint Study Group on LNG, including energy research institutes in LNG consuming countries.”

On Monday, consultancy Wood Mackenzie said that policy and regulatory uncertainty in Japan and South Korea could result in less LNG liquefaction capacity being developed, forcing continued tightness in the Pacific LNG market beyond 2020 and perpetuating relatively high spot prices. Others have said they expect to see the market loosening around 2018 with the addition of new supply.

While the Japanese and South Korean governments are promoting greater competition among LNG suppliers, uncertainty regarding nuclear generation and market liberalization may have the opposite effect and increase the cost of LNG procurement, Wood Mackenzie said.

Japan and South Korea combined account for more than 50% of global LNG demand, the firm said. Cautious incumbent consumers are buying only the LNG they are assured they will need, while new entrants in the gas and power markets are seeking regulatory clarity before committing to off-take.

“Both governments recognize their influence on the global LNG market and are actively pursuing initiatives aimed at reducing overall LNG supply costs through increasing competition between global LNG suppliers,” said Wood Mackenzie’s Gavin Thompson, head of Asia Pacific gas and power analysis. “However, a lack of clarity around the timing and extent of market liberalization as well as ongoing uncertainty around nuclear power in their domestic markets could have the opposite effect.”

“Power market liberalization could erode the regional monopolies of traditional power utilities and enable other players such as gas utilities, industrials and downstream companies to enter the market. Uncertainty about the future regulatory and competitive environment could result in all players delaying firm LNG procurement decisions.”