China will determine the future Asia-Pacific LNG landscape

Since Zbigniew Brzezinski introduced the concept of "geo-strategic chess player" in his world-renowned book, "The Grand Chessboard," any factor that can influence the changes in the regional power balance has become a focal point. Energy is naturally the focus of the focus.

　　As the peak of the traditional oil era fades, a new type of liquid fuel is beginning to be carried on giant ships crisscrossing the world's oceans. It has become a new type of fossil fuel that can have a profound impact on the global energy structure after oil, and that is liquefied natural gas (LNG).

　　When Brzezinski was teaching at the Department of Political Science at Columbia University, he certainly couldn't have imagined that the natural gas that was once used to "light up the sky" (burning off associated gas from oil fields in the form of torches to reduce hazards) would one day be compressed into liquid and transported around the world at a temperature of -160 degrees Celsius.

　　Even more unimaginable to him was that a Black student who sat attentively in the audience would one day become the President of the United States. During his term, the United States experienced a shale revolution, bringing the superpower closer than ever to its long-sought "energy independence" and making shale gas the hottest term in the global energy sector.

　　However, Brzezinski had foreseen one thing: China, as the "geo-strategic chess player" of the Asia-Pacific region, its development and needs in all aspects will profoundly affect the pattern of this region, and energy is undoubtedly the most typical example.

　　According to Bentek Energy, a renowned energy analysis company under S&P Global Platts, China's LNG demand will reach 56 million cubic meters in 2020, almost half of China's current apparent natural gas consumption, and this is only a conservative estimate. The severe smog plaguing the country has led to an unprecedented demand for this clean energy source.

　　Therefore, Stephanie Wilson, Asia LNG executive editor at S&P Global Platts, told "Caixin Eleven" that although traditional markets, including Taiwan and Japan, will maintain strong import volumes in the future, China will become a key factor in determining the changing pattern of the Asia-Pacific LNG market.

　　Looking at the Asia-Pacific LNG market from the broader perspective of Central Asia, China, Japan, and South Korea, as the main LNG importers, dominate the East Asian LNG game. However, the supply and demand situation in Japan and South Korea is also changing.

　　For a long time, Japan and South Korea have been seeking stable and long-term LNG supplies. Japan, in particular, has made LNG its core energy source, with the highest import volume globally. To ensure the stability of LNG supply, Japan and South Korea have been willing to sign long-term agreements linked to international crude oil prices with gas-supplying countries and long-term cooperation as the main trade form.

　　In fact, this is a relatively disadvantageous contract form for importing countries – gas-supplying countries must first sign long-term contracts before they are willing to develop and produce LNG. In addition, the contract strictly stipulates that LNG must be shipped from designated liquefaction plants in the exporting country to designated receiving terminals in the importing country, and no transshipment or resale is allowed, preventing Japan and South Korea from making profits as "middlemen".

　　As a result, exporting countries have virtually locked down the main LNG import volume in East Asia through long-term agreements, making the spot market stagnant and inflexible. Moreover, the term of general long-term LNG agreements is as long as 20-30 years.

　　Even worse, a significant byproduct of these long-term agreements is the famous "Asian premium." From oil to natural gas, Asia-Pacific countries have to pay a higher price than other regions of the world. For example, the average price of the North American natural gas benchmark Henry Hub was US\$3/mmbtu in 2013, the European NBP price was US\$8-9/mmbtu, while the current price offered by sellers to buyers in China, Japan, and South Korea reached as high as US\$15-16/mmbtu.

　　Therefore, Japan and South Korea are striving to change the current LNG trade situation. Stephanie Wilson believes that Japan may disappear from the spot market in the future because they already have sufficient supply.

　　On the other hand, after the Fukushima nuclear disaster, Japan's LNG imports surged by 10%, reaching 88 million tons in 2013. With the sharp increase in imports, Japan's energy costs have also reached a historical high, putting enormous financial pressure on the country.

　　South Korea's main importer is Korea Gas Corporation (KOGAS). Since the company is currently adopting a cost-reduction policy, South Korea did not purchase any spot LNG in the market in 2013 and will not have much success in the spot market in the future.

　　Therefore, looking at the entire East Asian LNG market, only China's huge natural gas market is still booming, with significant import growth from Qatar and Africa. There is no doubt that China's market development will be the main determinant of the future Asia-Pacific LNG market's position, pricing power, and benchmark price.

　　From this point of view, China's role as a "geo-strategic chess player" in the energy sector has become evident. However, due to domestic market monopolies and other limitations, China still has a long way to go to dominate the Asia-Pacific LNG market.

　　In fact, China's monopoly on crude oil and natural gas import rights has led to the abnormal development of the natural gas spot market. For example, China's natural gas spot trading center has been established for four years, but its annual transaction volume is pitifully small, only 400,000-500,000 tons, almost negligible.

　　Relevant personnel from the Shanghai Futures Exchange also revealed to "Caixin Eleven" that China's plan to launch natural gas futures faces many problems, such as tight warehousing and logistics facilities and the fact that the renminbi has not yet been internationalized.

　　Therefore, as Brzezinski said, "To become a global power, a country must be ahead in all aspects, including the nature of its government, the standard of living, and the rights of its citizens." Similarly, if China wants to become a country with global influence in the "natural gas age," it must redefine the boundaries of the government's power over the market, the scope of influence of state-owned enterprises, and the rights of private oil and gas companies.

　　It is evident that this is a game of LNG chess, but what is being compared is a country's comprehensive economic strength. To achieve a seasoned chess style and powerful moves, China is still on the road.