Japan To Create LNG Futures Market

Tokyo Electric Power facility east of Tokyo

Japan is planning to start the world's first futures contract for liquefied natural gas (LNG), marking the latest step toward creating a global market for the fuel.  The market for LNG—the chilled and exportable form of natural gas as the U.S. increases its exports of the fuel and global demand rises.

The price of gas varies widely across regions. Japan, the world's biggest importer of LNG, pays about $18 per million British thermal units, versus $4 for the product in gaseous form in the U.S. 

The cost of those imports is linked to crude oil, reflecting historic ties between prices in the two energy markets. But many users say U.S. production unleashed by the shale boom has weakened the connection between LNG and the oil market. A futures contract would allow LNG producers and consumers to determine gas prices independently from oil, and provide a way to protect themselves against price swings. Unlike the price of oil, which is set globally, the price of natural gas varies because consumers tend to buy from suppliers within their own region.

In the U.S., abundant supplies have caused gas prices to plunge from as high as $15 per million Btus in 2005 to about $4 today. Japan pays a premium because it has little domestic output and transporting LNG is expensive.

U.S. manufacturers, utilities and other companies that benefit from inexpensive domestic natural gas have spoken out against exports, because they fear prices will rise as the supply is spread more widely.  (WSJ, 3/31/2013)