One key theme of the 9th annual LNG Producer-Consumer Conference—held by Japan's Ministry of Economy, Trade and Industry (METI) and the Asia Pacific Energy Research Centre (APERC) on 12th October 2020—was the role of LNG in tackling the global climate challenge. Japan is seeking opportunities to use its position as the world's largest buyer of LNG to address this in two ways: to help drive sustainable growth of LNG supply and demand, particularly in emerging markets where it can help reduce emissions compared to oil and coal, and through decarbonization of the LNG value chain. The two panel sessions in the conference discussed these topics, bringing together players across the value chain.

Industry leaders representing a wide range of stakeholders gave statements providing context to the discussions. IHS Markit's Vice Chairman Daniel Yergin commented on the historical accomplishments and global expansion of the LNG industry through a video message: "In 1959, the Methane Pioneer sailed from Louisiana to England carrying the very first oceanic shipment of LNG, and a decade later in 1969, the first cargo arrived in Japan. In 2000 there were 12 producers and 11 imports, and today there are 20 producers with 43 importers."

The first panel session—chaired by Ken Koyama, Chief Economist and Senior Managing Director of the Institute of Energy Economics, Japan (IEEJ)—focused on pricing mechanisms favorable for sustainable growth of LNG supply and demand. Even before the impact of the COVID-19, the global LNG industry was entering a period of surplus as new supply capacity was coming online faster than it could be absorbed. However, the pandemic led to lower LNG—and overall energy—demand, leading to a greater overhang of supply and record-low prices. Combined with the oil price crash from the first half of the year, these market conditions led to delay in final investment decisions for new liquefaction projects, as international oil and gas companies were forced to cut capital expenditure and reassess future demand expectations. In this context, it has become increasingly important to find the right pricing mechanisms needed to provide security for project developers as well as encouraging greater demand for LNG in emerging and established markets.

Diversity of pricing mechanisms beyond oil indexation is important for many players, seeking prices that better reflect local demand and supply conditions. The key question is whether financial institutions will be willing to lend to new liquefaction projects where the development is underpinned by Asian spot prices. A recent IHS Markit paper explores how the commercial model for developing new LNG projects can be reshaped to attract capital investment[1].

The second panel session—chaired by Michael Stoppard, Chief Strategist for Global Gas in IHS Markit—explored how players across the LNG value chain are seeking to decarbonize the fuel. One of the topics explored was how sellers are working with buyers to create carbon-neutral LNG. For example, Japan's largest gas utility Tokyo Gas highlighted its use of carbon neutral LNG to achieve its net zero carbon dioxide goals. The company has announced at least three contracts with factories, office complexes and hotel to supply carbon neutral city gas towards the corporation's sustainability targets.

During the conference, Japan reaffirmed its commitment to LNG and outlined the next steps in its strategy. Japan has set a target to handle 100 MMt by 2030, including domestic demand and supply to emerging markets, and to work towards producing Hydrogen and Ammonia through utilizing carbon recycling and CCS. Japan Oil, Gas and Metals National Corporation (JOGMEC)—the state-owned company that works to secure stable supply of energy—has amended its rules to allow the financing of LNG reloading and import terminals outside Japan. The government is currently working to revise its LNG Development Strategy, originally devised in 2016, to address decarbonization. This will continue to be a key theme in other forthcoming plans, including the 6th Basic Energy Plan which details are due to be disclosed in 2021.

[1] See IHS Markit Strategic Report, LNG and the capital divide: Reshaping the commercial model

Learn more about IHS Markit's global LNG research and analysis.

Kaori Tachibana is a principal research analyst on the Gas, Power, and Energy Futures team at IHS Markit and is based in Japan.

James Taverner is a research and analysis director of the Gas, Power, and Energy Futures team at IHS Markit focusing on global gas and LNG markets.

Posted on 16 October 2020.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.