Japan’s Fukushima crisis was a decisive moment in the commoditization of LNG.
When LNG cargoes from around the world were diverted to Japan to fill the void left by nuclear energy, it put the spotlight on the short-term LNG market’s potential.
Japan’s preoccupation with energy security gave way to energy diversification and market flexibility, which would eventually lead to its advocacy against destination restrictions, a topic it would have never breached in the pre-Fukushima years.
The shuttering of Japan’s nuclear fleet and global backlash against nuclear energy would allow natural gas and LNG to expand its role in the energy mix, especially in Asia, at a critical time when the US shale boom and the first wave of US LNG export projects were looking for a reason to exist.
Traders and portfolio players emerged over the years, along with vital investment in the LNG supply chain like LNG carriers.
A top Japanese policymaker said at a METI-backed LNG producer consumer conference several years ago that had it not been for Japan’s post-Fukushima reliance on LNG, many current LNG market mechanisms would either not exist or have taken many more years to develop; and new buyers today had Tokyo to thank for laying the groundwork of the current LNG marketplace.
One of those market mechanisms is spot and short-term LNG trade, which now equates to roughly 30% of global LNG. Platts JKM, the LNG benchmark widely used in Northeast Asia and globally, evolved to be the cornerstone of this market.
On the front line
S&P Global Platts editors who covered Fukushima, both when the crisis unfolded and in the following years, have first-hand accounts of the incident and how JKM has evolved alongside the post-Fukushima LNG marketplace.
Takeo Kumagai, who covered the first flashes about the Great East Japan earthquake from his office in downtown Tokyo, writes a feature exactly 10 years to the day, on how Japan is moving on to its next great energy challenge, the net zero carbon pathway to 2050.
On March 11, 2011, after the earthquake Tokyo’s public transportation and telecommunications and millions were forced to take shelter in office or had walking for several hours to get home.
“One thing that I remember clearly standing out was the courage of our staff in Tokyo. Especially, Takeo, who just carried on relentlessly to give us some outstanding coverage despite all that was going on around them,” Mriganka Jaipuriyar, head of news, Asia, said.
Jonty Rushforth, who was manning the JKM desk in Singapore, said there was a rush of news in the following hours as the extent of the impact became clear, and the immediate question was whether there could in fact be any trade, and hence how could it be assessed.
He said many traders in Japan were without power and working frantically to get back online, and traders around the world were hesitant to give any firm values – out of a mixture of respect, uncertainty and trader instinct.
“Being able to provide an assessment of value during periods like that is crucial – it allows a disrupted market to find some sense of equilibrium, or at least to head towards that,” Rushforth said, adding that “fairly rapidly it became clear that Japanese utilities would pay anything for a cargo of LNG and the price skyrocketed.”
LNG was incredibly relationship-led in those days, and many existing suppliers were loath to jack up prices, while newcomers were wary of spoiling business relationships.
“At least one trader was heavily criticized for selling at a high price – with reports that buyers viewed it as sacrificing long-term relationship for short-term gain,” Rushforth said. He said slowly, the market found a new balance – one in which Japan would take every cargo available, but not at any price, as old oil-fired generation was taken out of retirement.
“Was it a turning point for JKM? Undoubtedly. This was the first time that the Japanese buyers “needed” spot supply (aside from Tepco in an isolated case during a previous earthquake) – and they had built up a level of trust for our prices over the previous two years,” Rushforth said.
He said Fukushima caused the second major divergence between spot and term prices since JKM was launched in 2009, the first one being during the global economic downturn, demonstrating that oil-indexation was not truly representative of LNG, and the role of a price reporting agency in price discovery at critical time period.