By Nikos Tsafos
Spot prices for liquefied natural gas (LNG) in general, and the Platts Japan Korea Marker (JKM), in particular, have become a routine feature in global gas market analyses. In part, this reflects the growing maturity of that indicator, which turned 10 this year; it also recognizes that more and more LNG, 31 percent in 2018, is now traded on the short-term and spot market. But headlines that treat JKM as the price for LNG in Asia can mislead: JKM reflects pricing for spot trades, not all transactions. Even today, the price of LNG in Asia largely tracks oil—and what Asian consumers pay for LNG is still mostly driven by oil. This is an important reality to keep in mind in discussions about the competitiveness of LNG in Asia’s energy mix, as well as the economic viability of different LNG supply sources.
The disparity between average import prices and JKM is clear in the graph below. The average price for LNG into Japan and Korea is very similar—and these two are similar to other prices in Asia, which are not shown on the graph to maintain legibility. In 2017 and 2018, JKM was, on average, 7 percent cheaper than the average price for all LNG imported into Japan. But JKM was more volatile, especially on a seasonal basis: in December 2017, JKM was 29 percent more expensive than the average LNG price into Japan; in mid-2017, it was 35 percent cheaper, and by April 2019, the discount was 50 percent. While JKM is a very important indicator, it does not fully capture what Asian importers actually pay for LNG.
The reason is that oil indexation is still prevalent in Asia. In 2018, around two-thirds of the gas consumed in Asia was priced in some relation to oil. The relationship between Japan’s LNG price and crude oil is shown on the right side of the graph. When a slight lag is added to capture the realities in most long-term contracts, the two lines track each other well, even though, at higher oil prices, the two can diverge on an energy-equivalent basis (and this divergence is not new—as the pre-2015 period shows). In short, JKM matters and increasingly so. But JKM is not an Asian LNG price; it a spot price, and until existing long-term contracts are converted to JKM or some other marker, it will be important to maintain that distinction in how we think and talk about Asian LNG prices.