IEEJ: December 2016 © IEEJ2016

Governments’ collaborative actions and

the globalization of LNG market
Strategic energy partnerships for LNG short-term demand recovery and long-term
security of supply

Marta Marinelli1

The Institute of Energy Economics, Japan

Introduction
The 21st Conference of Parties (COP) that the U.N. Framework Convention on
Climate Change (UNFCCC) held in Paris in December 2015 shed new light on
collective environmental responsibility and on the relevance of international
commitment to tackle global issues. The COP21 positive outcomes reinvigorated the
meaning of global “Climate Governance”, and the ratification of the Paris Agreement
less than one year later (November 4th 2016) signals countries’ serious commitment
towards decarbonization. With the conversion of INDCs into NDCs, there is now a
window of opportunities to lower the green-house gas (GHG) emissions of global
energy systems.2
With a reduced content of carbon dioxide (CO2), nitrogen dioxide (NOx), Sulphur
oxide (SOx) as well as particulate matter (PM), natural gas is a relatively clean fuel,
especially relevant for the power generation, the industrial and the transportation sectors’
emissions basket. As gas fired power plants have the shortest start-up time in
comparison to other substitutes (i.e. coal or nuclear), gas is a flexible load-follower for
power generation, suited to back-up renewables’ intermittency. As a less pollutant
hydrocarbon, fitting low-carbon requirements for the electric and industrial sectors and,
to some extent, also transportation, gas is potentially the “bridge fuel” smoothing the
shift toward less carbon intense economies. The portability of liquefied natural gas
(LNG) can make gas not only environmentally competitive against other fossil fuels,
namely oil and coal, but also economically gifted to outlast further scale up in climate
policies against high-carbon assets.3

LNG is a challenge and an opportunity to rescue the gas market. After having
been the globally fastest growing fossil fuel, natural gas strives now against state
subsidized renewables and environmentally irrational –though not economically - lack
of a global carbon pricing to hold back coal. Renovated emphasis on climate risk and
decarbonized development, thus, did not automatically mean an increase in the global
use of gas, and despite the ample reserves left untapped throughout the coal (19th) and
oil (20th) centuries, LNG is currently uncompetitive. Part of this economic unviability is

1 Internship student from Master Candidate,Paris School of International Affairs,Sciences Po

2
Countries communicated their Intended Nationally Determined Contributions (INDCs) on post-2020 climate action
prior to the COP21 negotiations. To be valid, the Paris Agreement should be ratified by 55 countries, accounting for
at least 55% of global GHG, when the submitted INDCs will entry into force and become Nationally Determined
Contributions (NDCs). Under the Vienna Convention on the Law of Treaties (1969), States that ratify an international
agreement undertake the obligation to be legally bound to the provisions they agreed upon.
3
LNG suitability to long-distance trade together with its low carbon content make it a valuable substitute to oil in
transportation, and potentially prevent it from being converted into stranded asset in case of an intensification of the
standards for pollution abatement.

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due to the fact that, conventionally, LNG transactions have been priced against crude oil,
as they were considered substitutes, preventing a gas market to emerge. notably for
power generation. However, now that their uses are distinct, traditional long-term
contracts (LTCs), with oil-indexation and destination and take-or-pay (TOP) clauses for
both free on board (FOB)4 and delivered ex-ship (DES)5 deals, prevent gas trade from
being flexible, expose it to the volatility of crude prices and threatens energy security
systems.
Additionally, some dramatic changes in the world’s economic order reduced the growth
rate of energy demand:
- Chinese “New Normal”, a slowdown in economic growth and the shift from heavy
industry to service-based economy;6
- Economic recession of the OECD countries and reduced energy intensity;
- Emergence of smaller, often low creditworthy buyers with precarious energy demand
outlooks.7
All these transformations have increased the uncertainty over global energy
consumption, casting out the relevance of investing in the gas sector. However, if the
challenge of price fairness is tackled, LNG could turn into the opportunity to develop an
international market for natural gas. Some changes have already occurred within the
industry itself, with growing spot and short term deals8 and price differentials between
regional markets being progressively eroded. Gas demand uncertainty coincided with
the start-up of U.S. and Australia’s massive LNG production, generating a supply glut
until the 2020s. Meanwhile, oil-indexed gas prices dropped up to a point where gas
production is no more looked as a profitable business, discouraging further final
investment decisions (FIDs). On the other hand, over-contracted major buyers have
started to trade excessive supply on the spot and short term markets and want to
renegotiate existing deals, waiting for supply and demand to rebalance before engaging
in new ones. LNG buyers on the Atlantic and Pacific basins are increasingly looking for
a globalized hub-based LNG market with ample network capacity and third-party access
(TPA) as well as sufficient number of market participants and the financial capacity to
reduce counterparty risk and provide long-term price signals for investors.9 Such a
liberalized hub will fundamentally mitigate the shocks of supply (i.e. the US shale
revolution) and demand (i.e. Fukushima crisis), increasing market liquidity and creating
trustworthy reference prices. Although oil-indexation persists in Europe, the only
unique market with two price mechanisms, both the U.S. and the EU currently have
reliable gas trading platforms with hub-based prices – the most famous being,
respectively, the Henry Hub (HH) and National Balancing Point (NBP). Asian markets

4
Free on board (FOB) deals transfer LNG cargoes title and risk to the buyer at the loading point. They do not include
freight costs.
5
Delivered Ex-Ship (DES) deals sell LNG, as well as title and risk, to buyers at the port of discharge. They do
include freight costs.
6
The 2016-2020 Five Years Plan sets an annual growth rate of 6.5% against the 7.8% of the past five years.
7
For instance, Egypt emerged as a new gas buyer in the last two years but its demand could fall by the end of the
decade following the development of the Zohr field. Similarly, uncertainty remains over the long-term demand from
South America.
8 Spot and short term deals are intended here as agreements not lasting longer than 4 years, according to the
definition of the IEA as it appears in Developing a Natural Gas Trading Hub in Asia, Obstacles and Opportunities,
Partner Country Series, 2013.
9
IEA, Developing a Natural Gas Trading Hub in Asia, Obstacles and Opportunities, Partner Country Series,
Structural Requirements to Create a Wholesale Natural Gas Market, 2013, p. 35

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are trying to implement such a mechanism for gas price discovery. The elimination and
relaxation of destination clauses in respectively FOB and DES deals, not to mention the
upgrade of domestic and cross-regional infrastructures and regulations are among the
key issues to the development of one or more gas trading hub(s) in the region.

The new LNG environment involves a plethora of new players: new exporters
(U.S.) and importers (Middle East), new supplies (AUS) and technologies (FSRUs) may
ask the stakeholders for new forms of engagement. The current gas supply glut is
expected be markedly reabsorbed after 2020s, prompting the need for additional
supplies. In this scenario, governmental choices in policy design and short-term
measures aimed to recover the security of demand for gas and LNG remain outstanding
challenges. They would be crucial signals to restore confidence in the gas market and
unlock FIDs for new projects, hence guaranteeing long-term supply security. Japan and
the EU have both highlighted the potential of internationally coordinated actions and
explicitly support the enhancement of a mutual energy dialogue.10
The present work tries to assess whether evoked “collaborative actions” between
governments can effectively sustain the development of a flexible, global LNG market.
The first section reviews some core vectors steering globally the transition to new
market conditions of natural gas and LNG industry, resuming some major events from
the global scale to the regional contexts of Asia and Europe.11 The second section
investigates the potential of governments’ partnerships to recover gas demand and
secure supplies in the post 2020s. A final section will look through some
recommendations for engaging in cross-regional energy diplomacy.

Global LNG landscape: changing features

The 2016 IEA “World Energy Investment” publication reports investments in
renewables to be on track with the Paris commitment to limit world’s temperature
increase to 2° C, especially in as far as power generation is concerned.12 Yet, global
spending on low-carbon resources and technologies in other sectors has been losing
ground. If it is no more possible to ignore a reorientation of market sentiment toward
new energy systems, there is still a widespread shortage of financing alternatives to
carbon intense fossil fuels, notably in transportation – the key oil consumption’s sector
– and industry. The report speaks of a “looming collapse in investment in LNG from
2017”, threatening the certainty of long term supplies on the post 2020 horizon and
driving, together with oil, the general fall in energy investments, down by 8% compared
to 2014.13
Unquestionably, high costs are the major hurdle besieging gas markets. The transition
toward less carbon intense energy systems requires expensive infrastructures conversion,
while the capital intensive LNG value chains, that require four to five years to be
developed, require long-term financing. Moreover, infrastructures to bring LNG to

10
See METI, Strategy for LNG Market [Link] flexible LNG Market and Developing an LNG Trading
Hub in Japan, May 2016, and European Commission, Communication from the Commission to the European
Parliament, the Council, the European Economic and Social Committee and the Committee of Regions on an EU
Strategy for Liquefied Natural Gas and Gas Storage, COM(2016) 49 final, Feb. 16 2016.
11
In the present work, unless differently specified, Europe is intended as the EU-28.
12
IEA, World Energy Investments, 2016.
13
According to the IEA, World Energy Investment (2016), major oil and gas companies cut upstream investments by
25% in 2015.

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gas-fired power plants usually have capital costs doubling the costs of a plant itself.14
Particularly where countries are relying on long-distance imports, such as in the Asian
case, this represents a considerable economic burden that makes gas uncompetitive.

Globally, governments have hitherto failed to implement transparent

regulations consistent with a “well below 2° C” trajectory and still able to attract
additional investors in gas, which is now exposed to a twofold competition from cheap
coal and subsidized renewables. Frequently, governments are concerned about gas
overreliance because, differently from oil, it is not yet freely traded on the global market.
This inflexibility, also due to physical impediments linked to its gaseous nature, makes
gas being perceived as a politically sensitive commodity, overexposed to the hazard of
discretionary disruptions. Governments often fear other countries’ anti-competitive
free-riding over carbon policies, a highly threatening prospect in the current economic
downturn which may discourage the adoption of tightened policies. If in developing
countries environmentally responsible norm codes have to fight off obligations of
modern, universal energy access, let alone budget constraints,15 OECD countries do not
make exception, whereby the back-up fuel option for renewables is often coal.16 Finally,
in places where coal reserves abound, gas switching is much questioned by (coal)
industries lobbying and by issues of resources national sovereignty and macroeconomic
impact.17

Yet, the recent turmoil in the LNG market fundamentals has substantially
changed the features of gas business, suggesting how the future of this last may depend
on the path of LNG itself. New players appeared either in the form of buyers or sellers,
downstream and upstream players. In 2015, the market was awash by a huge wave of
gas supply, the first to come on stream from the total estimated 150 mtpa that received
FIDs between 2010 and 2014. These are, notably, the supplies from the U.S.18 and
Australia that received FIDs even without 100% offtake commitment from buyers.
However, this abundant capacity has not been met by a comparable hoist in demand.19
A slower than expected demand in Asia and unclear scenarios for Europe coupled with
globally lower energy intensity (the energy needed to produce one unit of GDP) and left
some major buyers with unnecessary quantity of contracted gas. Consequently,
over-supplied markets responded with a weaker demand, creating an overwhelming
LNG supply glut deemed to last at least until 2020, when supply is still accounted to be

14
IEA, World Energy Investment, cit.
15
IEA, “The growth in coal-fired capacity remained strong in developing Asia, with over 75 GW starting operating
in 2015”, World Energy Investment, cit.
16
Especially from 2009, the combination of economic recession and non-market-based adoption of renewables made
gas to compete with coal for the tiny share of baseload generation available for fossil fuels plants, usually dispatched
after nuclear, hydro and renewables. Coal power plants were also sustained by low carbon prices on the EU ETS
market. See Anouk Honoré, The Outlook for Natural Gas Demand in Europe, The Oxford Institute for Energy
Studies (OEIS), 2014.
17
Luca Franza, Dick de Jong and Coby van der Linde, The Future of Gas: The Transition Fuel?, in Silvia Colombo,
Mohamed El Harrak and Niccolò Sartori (ed.), The Future of Natural Gas, Markets and Geopolitics, Istituto di Affari
Internazionali (IAI), 2016.
18
Four LNG export terminals are under construction in addition to the Cheniere Energy’s Sabine Pass, which started
shipping cargoes in February. Three have been approved but are not under construction, and a dozen are under
regulatory process.
19
Timera Energy, Global Gas Market, The Path to Market Recovery, Oct. 2016.

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426 mtpa against 372.7 mtpa of global demand.20

On the whole, the present situation of over-supply and weak demand, with
plunging commodity prices lying on the background, has changed the balance of power
in the gas market. The 2014 OPEC strategy not to restrict output and rebound the
market has resulted in lower oil-indexed gas prices.21 Though spurring some optimism
- especially in as far as consumption in China and India concerns -, the comparative
advantage of gas has been eroded by cheap oil. Moreover, with prices barely recovering
short-term marginal costs, the reduced returns on investments (ROI) have been
undermining the economic viability of new gas projects (as in the case for Canada and
East Africa). Indeed, after the prolific timeframe between 2010 and 2014, gas projects’
FIDs suffered a setback from mid-2014 which could seriously threaten the security of
gas supply in post 2020s.

Traditionally predominant sellers, demanding average 20-years LTCs with

restrictions such as the (in)famous destination or TOP clauses, are now faced with the
new buyers’ bargaining power and their aim to not only eliminate (in FOB) or relax (in
DES) unnecessary contractual rigidities, but also to actively engage in the upstream
sector to secure positions in gas fields and liquefaction plants.22 Consumers are now
given the choice between different competing producers, and the new need for
flexibility has been matched by the revolutionary tolling model of U.S. LNG contracts,
where offtakers pay for the right to use a train’s liquefaction capacity rather than gas
itself. Being them “pure” 23 or “modified” 24 , the flexibility introduced by U.S.
innovative contract structures paved the way for intensified short term and spot gas
trade, that accounted for 28% of the global LNG supply (68.4 mt) in 2015.25 Increased
volumes of flexible, destination-free LNG allowed so-called aggregators not only to
maximize profits by sending LNG to the most convenient markets,26 but also to take
stakes in regasification terminals (including FSRUs) in order to secure access and share
risks.
With one third of the 135 mtpa of expiring LTCs (2015-25) owned by aggregators, the
buyers’ trend of sourcing from the market instead of engaging in new LTCs and the
downstream participation to equity investments are likely to persevere.27

The abundance of gas traded in short term and spot markets also tightened the

20
Platts, Japan’s Oil and LNG Price Evolution, Special Report, S&P Global, Sep. 2016.
21
Andy Flower, LNG Supply Outlook 2016 to 2030, CEE, University of Texas, Jul. 2016.
22
David Ledesma, The Changing Commercial Structure of the Upstream and Midstream LNG Business, in
Anne-Sophie Corbeau and David Ledesma (ed.), LNG Markets in Transition: the Great Reconfiguration, Oxford
University Press, 2016.
23
Under the “pure” tolling structure (Sempra’s Cameron), upstream producers pay a fee (“tolling fee”) to
liquefaction sites for the right to use the plants and liquefy gas to source and “toll” their own gas through the terminal.
Then, through flexible contracts they sell LNG to buyers, often aggregators or portfolio players wanting to sell cargos
directly on the market on a flexible basis to exploit profits.
24
Under the “modified” tolling model (Cheniere), arrangements are delivered on a FOB basis and offtakers pay a
constant tolling fee (not subject to price review) even though the LNG is not taken. This is the basis to recover the
liquefaction plant’s CAPEX and OPEX.
25
International Group of LNG Importers (GIIGNL), The LNG Industry in 2015, GIIGNL Annual Report, 2016.
26
Anne-Sophie Corbeau, LNG contracts and Flexibility, in Anne-Sophie Corbeau and David Ledesma (ed.), LNG
Markets in Transition: the Great Reconfiguration, 2016, cit., pp. 511-14.
27
Anne-Sophie Corbeau, David Ledesma, LNG Market in Transition: The Great Reconfiguration, Perth, Australia,
Apr. 11-15, 2016.

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regional price differentials typical of the gas market. Likely, the glut will drive price
alignment between the Atlantic and Pacific basins, with price differences based
exclusively on shipping costs. With limited transmission capacity and price gaps, gas
markets have been indeed typically regional rather than global. In particular, regional
differentials expanded between 2010-14 as a consequence of mainly unpredictable
events: shale boom in the U.S., which became an exporting country and left Qatar with
over-capacity; the impact of economic recession that reduced both end-users demand in
developed countries and the price of coal; the rise in oil prices, with consequent market
liberalization and shift to hub-based gas pricing in Europe;28 the huge amount of
additional LNG to offset the nuclear shortage of Fukushima crisis in Japan, with
transactions based on (high) oil-indexed prices prompting a massive diversion of LNG
supplies to Asian gas markets.29

Increasing liquidity is the first step towards first physical, and then virtual LNG
Asian hubs.30 Limited LNG availability on the spot market led to the reliance on rigid
LTCs (with TOP and destination clauses) and irrational price mechanisms (such as
oil-indexation and “Asian Premium”), undermining the overall flexibility and
commoditization of gas. The progressive alignment of regional benchmarks towards a
global, internationally linked gas market – with the JKM (Platts’ “Japan-Korea Marker”
assessment price) and NBP closed to parity in early 2016 - is likely to spur a shift to
gas-on-gas pricing and to the upsurge of flexible portfolio traders in liberalized gas
markets, acting as price setters. Still, a shift towards contracts reflecting the new
conditions won’t necessarily imply a move away from LTCs tout court, but rather a step
in the direction of improving contracts flexibility. The gas security is not a matter to
take for granted, and the LNG business needs to be backed by liquid and trustworthy
trading hubs to offset the risks of price volatility while maintaining the stability of
long-term supply/demand security.

The U.S. and Europe successfully implemented regional gas trading hubs,
spurring a price for gas independent from oil and reflecting their own regional market
fundamentals. On the whole Asia, the lack of an integrated infrastructure for both piped
and liquefied natural gas is still a major hurdle, while in many countries oil is the only
substitute of LNG, jeopardizing the shift from oil price benchmark to gas-to-gas
competition. This shift would be crucial to develop a pricing rationale reflecting the
Asian markets own gas dynamics. The current supply glut is supposed to create more
competitiveness, facilitating liquid markets and the use of short-term and spot indices in
LTCs’ prices. The further development of one or more trading hub(s) in Asia will
unleash the discovery of a transparent price mechanism, leading to regional price
convergence and to the development of a global gas market.31

28
Economic recession costed Europe 40 Bcm in only one year, some 60% of total gas consumption. See Anouk
Honoré, The Outlook for Natural Gas Demand in Europe, The Oxford Institute for Energy Studies (OIES), 2014, cit.
29
Reloads from EU to Asia climbed from 0.1 million mt in 2010 to 6.4 million mt in 2014. See GIIGNL Annual
Report 2016, cit.
30
According to the IEA’s definition, a physical hub is a geographical point, sufficiently interconnected and centrally
located in the network, where a price is set for the natural gas delivered on that specific location; a virtual hub is built
on the existing pipeline system as a virtual, balancing point. See IEA, Developing a Natural Gas Trading Hub in Asia,
Obstacles and Opportunities, 2013, cit.
31
The alignment of prices still implies the existence of price differences between regions, as linked to the different
freight and ancillary costs peculiar of each market. What tightens is the spread between offers and bids, as the more

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Gas Asian “Pivot”

Traditionally, limited infrastructures and poor gas transit capacity across Asian
markets, with only 10% of gas traded via pipelines, have constrained the availability of
alternatives to LNG.32 Three regional gas centers have emerged:
- Japan, Korea, Taiwan, mature markets solely relying on LNG supplies;
- China and India, young gigantic markets endowed with pipelines and LNG
networks;
- Southeast Asia, historical gas producer with growing demand but weak facilities.33
Due to geographic conditions, Asian countries have been predominantly depending on
LNG imports. Combined with poor physical interconnections, this translated into a
stumbling inflexibility in both transportation and resources choice. As a means of
energy security, the reliability of gas supplies has started to be prioritized over the
economic rationale of price formation. This approach favored LNG LTCs priced against
oil benchmarks, usually the Japan Crude Cocktail (JCC), within a time lag of some five
months, with a price slope traditionally close to 14% and spot transitions priced above
or below the slope calculated for LTCs.34 Linking the LNG price level to global oil
rather than gas fluctuations yielded illiquid, rigid markets, unable to reflect gas trade’s
own features. Becoming a de facto gas premium market, ready to pay a price higher
than in U.S. and Europe (the “Asian premium”) for the security of gas supplies, Asian
countries have been missing the benefits of the developing spot and short-term market.
When the Asian premium peaked, in 2013, the idea of an Asian hub emerged as a tool to
correct price distortions.

In the Asian century, also the energy landscape is experiencing an

“Easternisation” of trends and the behavior of Asian markets is expected to determine
energy demand. Asian trends in thermal coal supply and demand, in many senses hold
the key to meet the 2° C targets. Among the reasons dimming further an already unclear
LNG picture, Japanese and Korean nuclear policies rank first in shrouding in
uncertainty future forecasts, followed by Chinese timeliness and path for a coal-to-gas
switch.35 On the other hand, India’s capability to deliver adequate infrastructures in
time to increase gas shares36 and additional gas demand from Southeast Asia are all
price sensitive issues. The recent IEA Medium-term gas outlook assumes Asia to
account for the 23% of the global gas demand, growing by 26% from the 711 billion

liquid a traded market is, the more it attracts participants to transact and it creates competition. Where competition is
limited, the gap between bids and offers might widen. Liquid markets instead create the confidence that the price of a
particular trade will be close to the price initially envisaged, encouraging further trading.
32
IEA, Developing a Natural Gas Trading Hub in Asia, 2013, cit.
33
Howard V. Rogers, Asian LNG Demand: Key Drivers and Outlook, OIES, Apr. 2016.
34
IEA, The Asian Quest for LNG in a Globalizing Market, Partner Country Series, 2014.
35
China plans to switch 115 bcm of coal consumption to gas over 5 years. See Oxford Energy Forum (OEF), LNG
Markets: the Great Reconfiguration, OIES, Issue 106, Aug. 2016.
36
India aims to shift gas shares from 6.5% to 15% of the energy mix in three to four years. Since domestic
production fell significantly (from 5 to 3.1 Bcf/d, 2011-16), this means an increase in imports from current 21 million
mt to 50 million mt and will require tremendous infrastructure’s improvements, especially in the eastern cost, to
ensure LNG terminals and gas distribution. India boosted the use of LNG through subsidies schemes provided for
power generators plants - having the market high price elasticity here. On September 2016, the Indian government
presented the “Vision 2030 – Natural Gas Infrastructure in India” foreseeing a rise in domestic production of gas and
a dramatic expansion in gas demand for power generation by the end of 2020s. Similarly, Platts Analytics sees
demand for LNG in India to double to 30 million mt/year in 2021 from the 2015 levels, sustained by revised contract
prices between RasGas and Petronet.

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cubic meters (Bcm) of 2015 to the 895 Bcm of 2021.37 While demand in the premium
markets of Japan and Korea will decline and marginally grow respectively, new
consumption is supposed to come from other gas poor Asian countries (India, Pakistan,
Bangladesh, Philippines). Elsewhere in the world, Middle East and Latin America are
also regarded as potential pockets of growth. However, even assuming low prices to last
and FSRUs to increase and facilitate access to gas market,38 they only have limited
potential to absorb the LNG supply glut at present. On the whole, it is the Asian
behavior that will transform gas demand growth, with the Chinese performance
dominating the outlook. Bullish figures on Chinese demand growth came from the IEA
and Wood Mackenzie,39 and both identified China as the key player of gas expansion.
Yet, assumptions on China are hazardous. It already leapfrogged traditional Western
steps of development, including in the energy sector, and might now be the first country
to cap energy consumption.40

World’s larger LNG consumer and main marginal gas price driver, Japan is
likely to remain over-contracted up to the next decade, with committed LNG forecasted
to peak in 2017 (90 mtpa) and fall down to 35 mtpa by 2030, with imports to decrease
accordingly by the same year (to 62 mtpa).41 Overall, about 20 million mt of contracted
LNG will be left in excess in 2020.42 The ability of Japanese buyers to lift destination
clauses in FOB and DES contracts and resell unutilized LNG capacity can boost a
transformation in the regional market, with other Asian players to follow the path. The
deal that JERA Co. 43 struck with the French EDF to sell over-contracted gas to
Europe,44 together with its declaration not to sign contracts containing destination
clauses, aim to challenge the established “one-way” direction of the gas market, and
show how the glut can be the chance for a trading hub to offset future supply-demand
imbalances. In this sense, METI’s recent strategy on LNG and explicit call for a halt to
oil indexation (“linking the price of LNG to crude oil is no longer necessarily
justifiable”)45 is a strong political commitment. On the other hand, the effectiveness of
power and gas liberalization - scheduled in 2016 and 2017 respectively - is questioned
by insufficient pipeline networks,46 which postpone hub’s achievements to 2020s.

37
IEA, Mid-Term Gas Outlook, Jun. 2016.
38
Floating Storage and Regasification Units (FSRUs) are a cost-effective way to ensure affordable supply. They do
not require upfront investments when provided through lease arrangements, and can be used on a seasonal basis.
Their development has been impressively successful, increasing from 1 to 19 vessels between 2005 and 2016. See,
Brian Songhurst, Floating Liquefaction (FLNG): Potential for Wider Deployment, OIES, Nov. 2016.
39
IEA forecasts Chinese gas demand to grow from 190 Bcm in 2015 to 320 Bcm in 2021; Wood Mackenzie
estimates demand to expand to 250 Bcm in 2019 and 300 Bcm in 2021. See Clara Tan, Asia’s Gas “Bridge” Starts to
Wobble, Energy Intelligence, World Energy Opinion, Aug. 2016.
40
Along with a national carbon market plan scheduled for 2017, Beijing plans to adopt a scheme in four provinces
(Zhejiang, Fujian, Sichuan, and Henan) to limit national energy use to 5 billion tons of standard coal equivalent in
2020.
41
Anne-Sophie Corbeau, David Ledesma, LNG Market in Transition: The Great Reconfiguration, Paper, Apr 2016,
cit.
42
Platts, Japan’s Oil and LNG Price Evolution, Special Report, S&P Global, Sep. 2016, p. 9.
43
JERA Co. is a fuel procurement joint venture of Tokyo Electric Power Co. and Chubu Electric Power Co. It is one
of the consortia between buyers aiming to optimize supply logistics.
44
Stephen Stapczynski, Emi Urabe, Dan Murtaugh, World’s Biggest LNG Buyer Becomes Seller As Gas Glut Builds,
Bloomberg, May 26, 2016.
45
METI, Strategy for LNG Market Development. Creating flexible LNG Market and Developing an LNG Trading
Hub in Japan, p. 7.
46
Sufficiently open and developed infrastructures are essential to ease physical transaction, which in turn improves
trade and mobility, helping the shift toward the relax/elimination of destination clauses.

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A flexible trading hub will be pivotal to remove Asian premium and ensure the
global stability and long-term affordability of supplies.47 The discovery of hub-based
gas price indices is fundamental for future supply and demand balance, and to create a
transparent and liquid market. Among the measures deemed necessary to develop a
competitive regional hub, the IEA recommend governments to adopt a hands-off
approach (i.e. shifting their role from policy makers to regulators, and arbitrators), to
separate the transport from the commercial sector, and to deregulate wholesale prices.48
Transformation, in Asia, requires at first the establishment of physically integrated
connections and TPA, then the participation of a sufficient number of players and finally
the involvement of financial parties, to ensure risk mitigation and a futures market
development. 49 Furthermore, Asian market players still need to develop two
characteristics that contracts have been lacked of late: standardization and
transparency. 50 Particularly, limitations on contracts information disclosure have
generated an overall opaque and unclear Asian market. In this sense, Japanese and
Singapore’s initiatives of, respectively, Japan Over-the-counter Exchange (JOE) and
Singapore Exchange LNG Index Group (SLInG) are important steps forwards to correct
these system’s inefficiencies.51

Creating a regional hub requires governments to engage in competitiveness,

security and sustainability of energy markets. Wholesale gas markets open to new
entrants, with equal treatment and liquid trade, improve competition and make
consumers and producers confident in the price signals set by the market itself. Looking
at the previous experience of Europe, the situation of Asian markets at present shows
some similarities. In 2008 gas demand collapsed with the U.S. no more in need for LNG,
additional supplies coming from new projects – i.e. expanding wholesale choices for
consumers -, and utilities suffering the oil indexation financial burdens, with increasing
tensions among end-users.
These pressures encouraged the adoption of legislations directed at improving market
competitiveness and access to low cost energy. Of course similarities do not mean
automatic repetition, and a transition to hubs in Asia still requires time to develop. Yet, a
comparative exercise is helpful to understand the changes (notably, deregulation and
unbundling) making inroads in Asian markets.52 Perhaps more important to remark,
however, is that hub-based gas prices will not automatically be cheaper than the

47
Discussions around the move away from JCC indexed prices started in the Fukushima aftermath, when the demand
spike in Japan generated a surge in the Asian premium ($14-18 in JKT and $9-14 in China and India) and Japanese
utilities made record losses.
48
IEA, Developing a Natural Gas Trading Hub in Asia, Obstacles and Opportunities, 2013, cit.
49
“Financial parties create their margins by carrying on risk exposure”. See IEA, Developing a Natural Gas Trading
Hub in Asia, Obstacles and Opportunities, 2013, cit.
50
In particular, different legacy contract terms make it difficult the standardization of cargo term sheets and of
Master Sales Agreement (MSA). See Edwin Loh, Life to get harder for LNG traders, World Gas Intelligence, Vol. 27,
No. 39, Sep. 28, 2016.
51
Singapore further launched a second pricing index, the North Asia Sling (with DES prices similar to FOB of the
Singapore Sling) probably to overcome the limits of remoteness ascribed to its ambition of becoming the hub setting
an East Asian price. See Jonathan Stern, LNG Pricing: Challenges in the Late 2010s, in LNG Markets in Transition:
the Great Reconfiguration, 2016, cit.
52
Japan has liberalized the electricity market in 2016 and will open up the gas sector in 2017. Other Asian countries
envisaging unbundling reforms include chiefly China, Thailand, Vietnam and Indonesia, with South Korea, India and
Malaysia expected to follow. See Nick Fulford, Ryan Pereira, Gas Market Reform – Death of Oil Indexation and
Resulting Impact on Asian and Global LNG Prices, Gaffney Cline and Associates.

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oil-indexed ones. The difference between price formation and price level is essential
here: the adoption of a transparent, hub-based gas pricing mechanism can avoid
imbalances in the price formation of upstream contracts versus downstream, but can
also potentially yield higher prices to be paid by traders. Beyond low oil prices, the
2016 higher gas-to-gas price resulted from referencing the cost of Asian gas to that of
HH, which benchmarks U.S. gas market fundamentals. If this link was appealing in
times of high JCC and low HH prices, when the situation reversed oil-linked prices
became lower than gas-to-gas prices. 53 Conversely, a properly functioning price
mechanism in Asia should reflect first of all the Asian own demand/supply
fundamentals. Before this transparent price is found - what could still require up to ten
years -, a hybrid formula of oil- and gas- indices can be adopted in Asia, to correct high
price on the HH-portion through the oil-portion, and spread the risk of oil index
exposure.54 The current gas oversupply is a unique opportunity to increase flexibility
and traders’ participation, to develop transparent price mechanisms and spot market, and
ultimately to enhance short-term security of demand. Depending on the ability to create
a profitable market, new supplies will be guaranteed for the post 2020, when 45%
increase in global LNG demand, driven by Asia and Europe will have absorbed the
glut.55

The EU hubs and Energy Union diplomatic commitment to LNG

The idea of energy supply security in Europe changed after that the geopolitical
crisis of 2006, 2009, and 2014 unveiled a Union exceptionally vulnerable to gas flow
disruptions and the threat of the overreliance on Russia. A new framework, the Energy
Union, was institutionalized in 2015 to provide concerted response to energy issues and
safeguard the whole EU self-reliance on energy requirements and security standards.56
The Energy Union aims for a single market where energy flows freely, and
competitiveness and bargaining power of consumers improve through the
comprehensive diversification of sources, suppliers and routes across Member States
(MS). If the 2015 Action Plan on energy policy coordination included LNG among the
key priorities for “new energy source” diversification,57 a dedicated strategy in 2016
definitively confirmed the will to enhance the EU resilience through LNG inclusion in
energy portfolios and the construction of new regasification terminals (significantly
labelled as Projects of Common Interest, PCI).58 Although not optimally allocated,
Europe has an important regasification capacity of total 154 mtpa, with terminals
situated in the Western, Mediterranean and Atlantic areas.59 Insufficient transmission

53
Jonathan Stern, LNG Pricing: Challenges in the Late 2010s, in LNG Markets in Transition: the Great
Reconfiguration, 2016, cit.
54
Howard V. Rogers, The Impact of Lower Gas and Oil Prices on Global Gas and LNG Markets, OIES, Jul. 2015.
55
METI, Japan’s Energy White Paper 2016. Long-term Energy Supply and Demand Outlook for FY2030, 2016.
56
On the Energy Union see European Commission, Energy 2020 – A Strategy for Competitive, Sustainable and
Secure Energy, (COM (2010) 0639 final, Nov. 10, 2010, and European Council, Conclusions (EUCO 11/15), Mar. 19
and 20, 2015.
57
Council of the European Union, Council Conclusions on Energy Diplomacy (10995/15), 20 Jul., 2015.
58
The regulation of 2013 on the Trans-European Energy Infrastructure (TEN-E) and the Connecting Europe Facility
(CEF) established a common policy framework in support of EU gas infrastructure (transmission, LNG terminals and
storage) and has identified to this end key projects of common interest (PCIs) to be prioritized. For information on the
TEN-E and PCIs see European Commission, Commission Delegated Regulation (EU) 2016/89 of Nov. 18, 2015
amending Regulation (EU) No 347/2013 of the European Parliament and of the Council as regards the Union list of
projects of common interest.
59
The LNG regasification facilities in the European Union are 23, representing some 20% of worldwide

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capacity, however, is responsible for MS imbalances regarding access to and benefits

from the international LNG markets, warning the overall EU market attractiveness and
security of supply.60 The additional 126 mtpa planned capacity and 13 mtpa under
construction61 are intended to correct the non-homogeneous LNG liquid trade of the
European hub system, indeed highly diversified.

Currently, the Union presents a variety of gas hubs, ranging from Trading Hubs
(NBP, 1996; TTF, Title Transfer Facility in the Netherlands, 2003), to Transit Hubs
(ZEE, Zeebrugge hub, 2000; CEGH, Central European Gas Hub, 2005) and Transition
Hubs (GPL, Gaspool Balancing Services hub, 2009; NCG, NetConnect Germany, 2009;
PEGs, Points d’Echange de Gaz, 2004; PSV, Punto di Scambio Virtuale, 2003).62 With
a low rate of utilization (24% on average), excess regasification capacity makes Europe
a market of “last resort" for distressed cargoes, increasingly seen as the main recipient
of glutted LNG, although nearly six months after the start-up of LNG production at
Sabine Pass trains in the U.S., only two cargoes headed to Spain and Portugal, limitedly
connected with the rest of Europe, and one to Turkey.63 With the end of winter in South
America - preferred destination of U.S. volumes so far - and tightening Asian and
Japanese markets, wide is the consensus that the proliferation of gas hubs, combined
with the huge wave of new flexible supplies, will promote additional LNG imports in
Europe in 2016-20, being the best-price alternative at least until the market rebounds.64
Rather than on demand raise, assumptions are based on falling domestic production
(supplying 50% of total needs in 2014)65, and on the available infrastructures and
political will to diversify gas sources (namely from Russian piped gas, retaining alone
some 30% of market share)66 and shipping fuels. Yet, the gas sector strives to find
stability among energy efficiency policies,67 subsidized renewables and low-priced coal.
In Europe, low gas prices did not push a U.S. alike significant shift from coal to
gas-fired power generation. Ironically, heavily subsidized renewables have incremented
the use of coal as cheap backup complement, eroding the regional energy security of
supply.68

Trade is an unquestionable priority to mitigate supply risks and sustain the

regasification capacity.
60
Four MS in the Baltic, central-eastern and south-eastern regions are exclusively relying on Russia and have poorly
connected infrastructure that stir up EU vulnerability to disruptions on a regional scale. See COM(2016) 49 final, cit.,
p. 2.
61
Oxford Energy Forum (OEF), LNG Markets: the Great Reconfiguration, OIES, cit., p. 11.
62
Classification taken from Patrick Heather, Continental European Gas Hubs: Are They Fit for Purpose?, OIES, Jun.
2012.
63
The perspective of US LNG imports into Europe is strategical for geopolitical purposes, though it has significant
practical shortcomings when it comes to prices, suppliers’ and inter-fuel competition, especially in comparison with
Russian gas.
64
Jaime Concha, Chapman Alexandra, US LNG Seen Hitting Europe Next Year, Natural Gas Week , Oct. 24, 2016.
65
With the exception of Norway, indigenous gas production started to decline almost everywhere in 2000s, and
sharpened recently with cap on the Groningen gas field production the Netherlands. See LNG Markets in Transition:
the Great Reconfiguration, LNG Demand Potential, cit., p. 311.
66
Pipeline imports from North Africa are not likely to increase unless Egyptian Zohr field is developed quickly,
while the development of the Mediterranean fields of Israel and Cyprus as well as of the Southern Gas Corridor are
facing political complications.
67
The 23rd WEC on Oct. 2016 (Istanbul) envisaged “A new world for energy industry” and global per capita energy
demand to peak by 2030 thanks to new technologies and efficiency policies.
68
Giacomo Luciani, The EU and LNG as a Flexible Tool for Energy Security: Constraints and Opportunities, in The
Future of Natural Gas, Markets and Geopolitics, Istituto di Affari Internazionali (IAI), 2016, cit.

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business. In this sense, the path towards gas market liberalization of the EU has enabled
the discovery of hub-based price mechanisms, with following developments in market
competition and consumers’ choice. But unlike North America - the only market to price
gas on a purely supply and demand base -, the EU has to cope with the internal
differences persisting in the unique market that impose a reliance on a two-price
mechanism. Since 2010 hub-based (50% of transactions in 2014)69 and oil-indexed (in
particular for Russian and North African gas) prices have coexisted. The double pricing
mechanism is owed to the market’s regulatory changes emerged in 2006, when Europe
evoked the implementation of a more “coherent external energy policy”.70 The revision
of the EU Security Strategy in 2008 and the Treaty of Lisbon adoption in 2009
established a new energy policy approach towards competitiveness, supply security and
environmental sustainability which then found realization in the Energy Union.71 In the
same 2009 the “Third Energy Package” 72 set the legislation to create a single,
competitive market by providing codes to split the generation and marketing sectors
from the transmission and distribution of electricity and gas.73 By virtue of the 1994
Energy Charter Treaty, these policy commitments were rules based, and legally bound
MS to cross-border cooperation towards production, trade and transit, on the model of
WTO. No more able to pass costs on consumers, like former large wholesale
“intermediaries” between producers and end-users, the new trading companies were
required, by regulation, prices reflecting the value of gas as signaled through hubs.74

The proliferation of European hubs in the 2000s is attributable to a move away

from monopolistic structures - where vertical integration allows for artificial adjustment
of supply and demand imbalances within companies’ portfolios - to a more variegated
landscape of different agents in need to balance the physical flows in the transmission
systems (TS) - i.e. the aggregate injections and withdrawals of gas -, and to adjust
volumes to shocks by clearing positions through wholesale trade. 75 Wholesale
marketplaces offered buyers an alternative source of gas provision to lower the cost –
so-called option value of second sourcing – and to resell unneeded shares of contracts,
required under TOP clauses. Progressively, sufficient liquidity enabled sellers to exploit
price differences and arbitrage opportunities, thanks to price differentials reflecting
transportation and ancillary services (i.e. bank or insurance costs).

69
Chi-Kong Chyong, On the Future of Global LNG Trade and Geopolitics, in The Future of Natural Gas, Markets
and Geopolitics, Istituto di Affari Internazionali (IAI), 2016, cit., p. 43.
70
European Commission, A European Strategy for Sustainable, Competitive and Secure Energy, COM(2006) 105
final, 8 Mar 2006.
71
Determinant for the Energy Union ware changes in European Security Strategy (ESS). When first implemented in
2003, ESS did not include energy security among its top five priorities (Terrorism, Proliferation of Weapons of Mass
Destruction, Regional Conflicts, State Failure, and Organized Crime). After the burnt out of the first Ukrainian crisis
with Russia (2006), the ESS strategy was revised in 2008 to include also energy security, cyber security, and climate
change as key threats to the stability of the EU as a whole.
72
For internal gas market common rules see Directive 2009/73/EC of the European Parliament and of the Council,
Jul. 13 2009.
73
Because the details of the new market were to be provided by national regulators, the common “Gas Target Model”
(GTM) was created to harmonize visions. CEER, ACER and ENTSOG are the authorities in charge of implementing
and enforcing the legislation.
74
Patrick Heather, Continental European Gas Hubs: Are They Fit for Purpose?, OIES, 2012, cit., p. 27.
75
This is the case for, particularly, shippers with opposite net positions. See Caterina Miriello and Michele Polo, The
Development of Gas Hubs in Europe, The Center for Research on Energy and Environmental Economics and Policy,
Bocconi, 2015.

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As long as a wholesale trade develops liquidity increases, clearing the market

from the confidentiality of LTCs, creating reliable (wholesale) price signals. Since price
volatility remains, in order to protect their exposure, the new energy companies need to
use the market not only for physical balance and adjustment purposes but also for
financial risk management, increasing the hubs liquidity.76 Hence, following a first
entry/exit balancing phase and a rule-based second sourcing phase, both strictly
physical, the hub develops so as to provide deals to manage price risks, such as futures
and forwards. According to this process, before well-functioning LNG trading hubs
develop in Asia the region has to first and foremost enhance integrated gas
infrastructures at a domestic and transregional level, as well as TPA access. Unlike
physical phases that generally develop within each national gas systems, financial
wholesale markets can also emerge in places other than those of physical trade, and are
usually smaller in number.77 Albeit the likelihood of a thriving number of hubs to
develop in both European Union and Asia, therefore, they will not be necessarily all
price markers. As short term transactions increase, indeed, the liquid hubs supposed to
be used for benchmarking and risk management will only be few, whereas several
national hubs with spot traded volumes and tight price correlation to the regional hub
will emerge for physical balance and portfolio’s adjustment purposes.78

On the whole, the willingness of both utilities to adopt contracts based on hub
prices and market players to grab opportunities for portfolios trade and management
will be key to settle gas hubs. Governments, however, can stimulate the process from a
physical and an institutional point of view, through the realization of the needed
infrastructures and regulatory frameworks against anti-competitive behaviors. In times
of disruptions and scarcity, the price of LNG will rise, and spot cargoes can be costly in
terms of budget and time.79 Trading hubs are flexible tools to respond to urgent needs
and immediate actions, thanks to mechanisms of transparent and timely reported prices
allowing for comparison. As hubs facilitate the trade of LNG, an effective geopolitical
“game changer” insofar as it expands consumers’ choice and bargaining power, they
fundamentally deliver requirements of national energy security. However, they also
demand accelerated reactions and fully information to be available at any time and place.
They might thus sometimes require the establishment of dedicated teams or departments,
and often the implementation of targeted policy measures.

Collaborative actions: going beyond conventional borders

The imbalance of the global gas market, where the LNG supply glut is
expected to last at least until 2020s, together with low gas prices have contributed to the
defer of new projects’ FIDs from 2014 onwards, a fact which now questions the
availability of future provisions. As long as upstream players’ capability to invest is
76
In this phase of hub development companies need gas, power and coal as well as contracts portfolios, with
different maturity and structures, in order to manage and hedge risks.
77
For instance, although the TTF became the Continental Europe reference hub, it has not yet developed a range of
hedging financial instruments compared to the NBP, and the two hubs cannot compete in terms of financial capacity.
See Caterina Miriello and Michele Polo, The Development of Gas Hubs in Europe, cit., p. 23.
78
Jonathan Stern and Howard Rogers, The Transition to Hub-Based Gas Pricing in Continental Europe, OIES, Mar.
2011, p.44.
79
“It may require at least one week for a shipment to arrive in the crisis area”. See the European Commission,
Communication on the short term resilience of the European gas system. Preparedness for a possible disruption of
supplies from the East during the fall and winter of 2014/15, COM(2014) 654 final, Oct. 16 2014.

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deteriorating alongside plunging oil prices, the LNG industry needs a shared
commitment from stakeholders’ towards market principles - involving in equal measure
supply and demand security, but also that of capital, returns and risk allocation -, since
well-functioning markets mitigate investments uncertainty.
“The pressure on budgets at oil production companies is driving consolidation
in the oilfield services industry”,80 and to manage current gas market uncertainties,
pooling together volume and price risks, new consortium initiatives are intensifying on
both a producer-consumer and consumer-consumer basis, with the most relevant
example being the JERA Co., the joint venture that became the world’s biggest buyer of
LNG. 81 On the demand side the attractiveness of LNG depends on financial and
environmental advantages against other fuels.82 If confidence has to be restored, the
engagement in intraregional coherent policies is needed to establish flexible, innovative
and cost-reflective incentives to support spot market activities and the global recovery
of demand.

Global Public Goods and Peer Pressure

The notion of collaborative actions may recall by itself a variety of players
sharing common interests. Global public goods, being goods that everyone can equally
benefit from on a global scale, require concerted measures to preserve conditions and
ensure fairly distributed costs – that is to say, marginalize free-riding practices.
Expression of cooperative initiatives targeting global public goods, the idea of
environmental governance entails a plethora of members of the national and
international scene, both state and non-state actors. The big question remains how to
hold the accountability of national participants, representing peculiar interests, in the
broader and mainly unelected contest of global governance. Globalization and the most
global of its challenges, climate change - at the heart of environmental policies - call
upon governance models that question the traditional conception of politics, which now
needs to be accountable not only for national bureaucracies, but also those of
international organizations such as the UNFCCC.

The Paris Agreement provided a framework, not a method, and indeed a

breakthrough in decarbonization paths has not materialized yet. Keeping the global
temperatures under the 2° C is an ambitious target that would practically mean zero or
below zero emissions. If energy efficiency is the more effective tool in the short-term, a
long-term paradigm shift of energy systems will have the paramount impact. LNG
comes under this strategy inasmuch as it represents a flexible low-carbon alternative,
notably in the power generation and, to a lesser extent, the mobility sectors. Because the
stakes of globalized markets – including LNG - structurally transcend physical and
territorial limitations, the promotion of shared views rather than geographic proximity
can effectively provide stakeholders with global coherence and problems orientated
policies. Reliability - and thus predictability - is a key element for workable
policy-making. In the perspective of policies in favor of LNG, envisaging collaborative
actions between peers has the potential to deliver political and economic robust
80
Ed Crooks, Hold the Champagne, Financial Times, FT Energy Source, Nov. 4 2016.
81
JERA Co. is a joint venture created in 2015 by the Tokyo Electric Power Co. Inc. (TEPCO) and the Chubu Electric
Power Co. Inc.
82
Chris Le Fevre, LNG as a Transport Fuel, in Anne-Sophie Corbeau and David Ledesma (ed.), LNG Markets in
Transition: the Great Reconfiguration, 2016, cit., p.443.

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relationships, and hence to facilitate concrete climate policy achievements.

Peer pressure has been an instrument widely used in soft power organizations
(OECD, G20) to shape performances and promote a sense of affiliation by means of
mutual assessment and peer reviews built on a perceived sense of common identity and
expertise. The “best practices” become here an instrument of policy making that provide
the standards against which review States’ national policies. 83 These incentive
mechanisms of mutual influence are productive processes not only for views exchange
and international high-level dialogues, but also for concrete reforms, particularly in case
of “clubs” like arrangements. The effectiveness of clubs mechanisms in climate deals
has been explored by Nordhaus (2015), who concludes that a Climate Club with
penalties for nonmembers is the more effective way to marginalize free-riding practices
and promote participation to agreements involving global public goods.84 The rationale
is the voluntary sharing of the costs of producing a public-good-type resource to
mutually enjoy the benefits of membership at penalizing costs for nonmembers. 85
Although sanctions on international trade are recognized as the most powerful
instrument of penalty, benefits from climate deals include also technologic transfer and
R&D cooperation, and penalties can be therefore intended as an exclusion from such
schemes of knowledge sharing: not direct injunction but indirect incentive to participate
instead. With a minor but still consistent part of abatement costs depending upon
regions’ technological and sectorial differences, weakened technologic and knowledge
transfer makes resources indeed more expensive, which explains why very high value is
placed on promoting R&D as a tool to deal with climate change by many industry
leaders, chiefly in Japan.86

International energy partnerships, with ancillary initiatives of technological and

intellectual capacity building, are a genuinely fertile environment to exchange
knowledge and improve competitiveness, especially in a context of homogeneous
membership. Identity-defining international organizations make a wide use of peer
pressure mechanisms to influence policy-making.87 Although in some specific cases the
involvement brought about by membership does not translate into practical and
operational activities (such as OECD, where it however translates in accession

83
It is noteworthy that much of this identity sentiment is fostered by these institutions’ perceived unbiased advices
and expertise. See Tony Porter and Michael Webb, The Role of the OECD in the Orchestration of Global Knowledge
Networks, May 2007, Canadian Political Association Annual Meeting, Saskatoon, Saskatchewan, Canada.
84
William Nordhaus (2015), Climate Clubs: Overcoming Free-riding in International Climate Policy, American
Economic Review 2015, 105(4): 1339-1370. An admittedly idealized solution, not existing in its pure form, the
Climate Club is a top-down approach to understand the forces underlying the international agreements working
processes and find mechanisms to limit free-riding. The analyzed sanctions consist on imports tariffs uniformly
levied by members to nonmember countries as either carbon duties or uniform tariffs. Shortcomings persist, however,
inasmuch as carbon duties are complicated to compute, while all-imports tariffs would represent a major departure
from international trade law, as pointed out by Nordhaus himself.
85
For the theory of “Clubs” see James M. Buchanan, An Economic Theory of Clubs, Economica, New Series, Vol. 32,
No. 125 (Feb., 1965), pp. 1-14, Wiley, The London School of Economics and Political Science and The Suntory and
Toyota International Center for Economics and Related Disciplines.
86
Mitsutsune Yamaguchi and Keigo Akimoto, The view from different parts of the world: A view from Japan, in
Scott Barrett, Carlo Carraro and Jaime de Melo (ed.), Towards a Workable and Effective Climate Regime, CEPR Press
and Ferdi, 2015.
87
In their constructivist analysis of the OECD, Porter and Webb (2007) argue that the explanation of OECD’s
existence and effectiveness owes more to the mechanisms of organization’s identity and values than rational
calculations.

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mechanisms, where non liberal-democracies are prevented to adhere), in other

like-minded fora such as the G7 or G20 the concept of “peers” fosters the alignment of
states behaviors and domestic policy design. Similar conforming power have also the
three clusters of parties’ parallelisms, cross-border imitation and learning process, the
features supposed to traditionally shape global trends towards policy convergence.88
Finally, the engagement in “soft law” frameworks, together with the mobilization of
international expertise, has a huge potential to preserve over the long run commonly
designed policies from the interference of narrower national political.89

International climate deals are aimed to address the shortcomings of global

environmental governance, where diplomatic tools eventually turn out to be an essential
connector between the internal and external dimensions of policymaking. Though
environmental outcomes still have to prove successful, the COP21 political success
owes much to the exceptional efforts of French diplomatic body. Assuming alignment
of views and policy orientation, it follows that the same mechanisms could also
influence policy implementation of other relevant areas of global governance, such as
those involving energy collaborative actions. Given the structural features of sense of
membership and identity among participants, certainly enforced by the sense of world’s
leadership among members, the G7 and its Energy Ministerial Meeting (EMM) can be
legitimately assumed to follow the same mechanisms. Established in 1979 as a side
event of G7/G8 conceived to harmonize energy policies and discuss the financing of
energy security and sustainability, the EMM has shown in recent times a significant
escalation of the scheduled agenda. After a leap of nearly 20 years, from 1998 it
gathered almost every three years. The speeding up of the energy ministries’ meetings,
which started to meet each year since 2014, may suggest an aspiration of this
international “club” to undertake the creation of a cross-national platform for energy
policy coordination.

The EMM potential further consolidates in moments when converging visions coexist
with converging interests, as it is the current case of LNG momentum. If the accelerated
frequency of meetings is a signal per se of the increased concerns over gas supplies’ stability
unleashed by the Ukrainian crisis, there is an explicit commitment to start an enduring and
systematic action towards the consolidation of the security of the global energy architecture.
Such a commitment ended up in the agreed promotion of a more integrated strategy towards the
promotion of diversified energy systems, notably through a widespread use of LNG that was
regularly reiterated in the EMM of Rome (2014), Hamburg (2015), and Kitakyushu (2016).

Governments to boost LNG demand

Markets always clear, and market forces are likely to reabsorb the supply
surplus through clearing mechanisms that involves both the supply and demand sides.
Inasmuch as demand concerns, gas still lacks a dominant sector of consumption, and
only a governments’ clear signal in support of gas will restore the confidence in the
market, driving on the necessary further investments. Thus far, though on the rise in
88
Kerstin Sahlin-Andersson, National, International and Transnatioanl Constructions of New Public Management,
Stockholm Center for Organizational Research (SCORE), 2000.
89
Marcussen (2004) sees the soft law produced by international organizations as more powerful than usually thought,
especially in comparison with the hard power of international treaties. See Martin Marcussen, OECD Governance
Through Soft Law, in U Mörth (ed.), Soft Law in Governance and Regulation: an Interdisciplinary Analysis,
Cheltenham, 2004.

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companies’ agendas, the adoption of responsible business conducts (RBC) and

corporate social responsibility (CSR) approaches have been subjected to voluntary
inclusion of environmental, social and/or governance issues in strategies and
management practices. If the market fails to deliver responsible behaviors by itself, then
the governments’ involvement will be advantageous to coordinate policies that, far from
being purely voluntarily, head towards sustainability. The use of energy as a diplomatic
tool may give rise to new platforms of policy coordination and, with regards to LNG, of
concrete engagement in relevant actions to boost demand, such as in the coherent
monitoring and evaluation of global markets and policy implementation. The reliability
of the LNG business can be ensured through governments’ provision of sound
regulatory, financial and institutional frameworks aiming to boost short term demand of
low-carbon resources and support cost-effective solutions for investments that ensure to
suppliers the long-term consumption.

On the policy side, governments can stimulate demand for gas by pricing
carbon, either in the form of direct taxes, indirect cap-and-trade emissions schemes or
hybrid mechanisms. Command-and-control measures can also be included (such as
rules to expand moratoria on new coal plant permits and constructions, to accelerate the
retirement of old plants, to promote electricity market reforms to prioritize low carbon
dispatch on the merit order), though carbon pricing is seen as the game changer for
investments recovery in the gas sector. Many of the biggest Oil & Gas (O&G) industry
players have already started to back an internal, hidden price on carbon into calculations,
to limit the impacts of an eventual scaling up of environmental regulations in the future.
The cost of adding a carbon price on investment calculations seems to be lower than the
costs embedded in the current environment of policies uncertainty, lacking coherence
and clarity.90 A de facto price, with more predictable cash flows, helps shareholders to
have clearer expectations on the returns of investing on certain fuels rather than others,
lowering the risks of exposure. Not only O&G companies, but also assets management
firms warn against the risk of ignoring climate-related regulations and technological
disruptions in investments portfolios. 91 Risks that are furthered by the
environmentally-conscious tomorrow’s ruling class of “millennials”: the disruptive
potential of their different transportation and energy choices as well as careers
objectives may impact the O&G companies all along its value chain. On the whole,
signaling a long-term commitment to decarbonization through regulatory responses is
likely to spur demand for less carbon-intense natural gas. Bolstered climate regulations
are widely expected by the industry, a thing that would make explicit political
engagement in this direction less impacting than expected and even advantageous in
improving market clarity.

On the financial side, LNG infrastructures development is capital intensive and

can exceed the private sector willingness to risk, especially when uncertainties persist
on future demand. Subsidies would be clearly the most straightforward form of
financing, though in the current economic slowdown do not seem workable.
Governments can ease the availability of public funds to develop facilities and

90
Amy Myers Jaffe, A Price on Carbon May Be Coming Soon to the U.S., The Wall Street Journal, Sep. 13, 2016
91
See Black Rock Investment Institute, Adapting Portfolios to Climate Change. Implications and Strategies for all
Investors, Global Insights, Sep. 2016.

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technologies, improving investments recovery. Financing options range from the

support to private-public partnerships (PPP) to solutions involving investments from
national Export Credit Agencies (ECAs), commercial banks or national development
banks (NDBs). For instance, among the schemes envisaged by the European Investment
Bank (EIB) to finance the Connecting Europe Facility (CEF) programme - which
established the mentioned PCIs to support EU gas infrastructures -, the Shipping
Financing Tool (SFT) has been proposed as a tool to develop a competitive LNG fleet.
It would fund different operators by pooling proposals and loans together rather than
finance projects one by one, allowing for economies of scale. In case of non-payment
from corporate, international financial institutions (such as the EIB, in the case of the
European Union) play the role of a “first loss” guarantor, while a potential “second loss”
guarantor will be played by MS funds. Finally, SFT identifies an additional source to
finance “pooled” projects in tax programs or port fees reduction for compliant ships.
Portfolio approaches aiming to restore investors’ confidence, such as through “first loss”
and “second loss” guarantees’ schemes, have a huge potential to rump up consumption
of LNG. 92

Public-private cooperation is meant to balance financial risk by involving

public money and ensure production even when banks are reluctant to lend, as in
periods of overcapacity. But financial instruments cannot solve market imbalances by
themselves. If the LNG industry needs to pursue new, competitive business models – i.e.
by lowering costs all along the value chain, keeping prices affordable also to new
markets through innovation and modularization -, the establishment of regional open
markets calls for an inclusion of public authorities to institutionalize the energy
liberalization. 93 Governments can provide mechanisms to identify possible
uncompetitive behaviors (such as the destination clauses) and the institutions deputed to
market control, becoming arbitrators rather than purely policy-makers. Despite the
profusion of EU hubs, the supervision pertains to only one regulatory entity, with the
movement towards the institutionalization of a unique market with uniform regulation
starting from the initiative of one most liberalized country to open up its own energy
market. The UK NBP has evolved rapidly, shifting from a physical balancing platform
to a gas trading point in only few years.94 This first step led other European countries to
emulate, then new Transmission System Operators (TSO) to emerge and the following
extensive need to balance positions and create hubs.95 This spreading engagement
created a concrete interest in joint regulations to ensure fair trade, competitiveness and
equal opportunities for all players. The interest towards a steering transnational body -
such as the Energy Union - to speak a common voice can be seen as inherently tied to
such bottom-up initiatives to share and ensure competitiveness.

A diversification of gas procurements at equitable and reasonable prices might

imply a connection between internal and external policies, to provide aligned visions

92
Italian Ministry of Economic Development (MISE), Documento di Consultazione per una Strategia Nazionale sul
GNL (Consultation Paper on a National LNG Strategy), Jun. 2015.
93
Liberalization, in turn, is expected to further push producers to find new solutions to lower the costs of production
and compete against new entrants and is likely to reduce the cost of infrastructures.
94
Caterina Miriello and Michele Polo, The Development of Gas Hubs in Europe, cit, p. 23
95
The TSO ensure the physical operation of the system. For balancing purposes, it can engage in trading on the
wholesale market (balancing actions) or recur to third parties to supply natural gas (balancing services).

18
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amid consumers and boost the global competitiveness of LNG. In the age of buyers’
bargaining power, a purely national approach may fail to fully exploit importing
countries’ synergies and, hence to catch the multiple benefits of the buyers’ advantage.
Proactive actions to smooth the transition towards low-carbon energy systems are likely
to require governments and policy-makers of the most exposed LNG importing
countries to engage together in “energy partnerships”. The external dimension of energy
policy has been already integrated in the recent EU and Japanese agendas on demand
security, both openly welcoming collaborative approaches to expand LNG use at
contained costs, with the EU adoption of an explicitly diplomatic energy strategy.

Energy diplomacy and Diplomacy of Resources: the case for EU-Japan partnership
The 2014 “2030 Climate and Energy Framework” and the European Energy
Security Strategy (EESS) recognize energy as a matter of foreign and security policy,
insisting on its consistent inclusion in political dialogues and Summits with strategic
partners.96 The following “Energy Diplomacy Action Plan”, approved by the Council in
2015, has institutionalized the mutual enforcement between external and internal
dimensions of energy and climate policy.97 Launched by the European External Action
Service (EEAS), the appointed body for EU foreign policy, as a cornerstone in the
Energy Union, the new strategy promotes common responses across MS as well as the
enhancement of existing cooperation and the establishment of a new one with key
global partners. The Energy Diplomacy tool requires the Commission and the Council
regular commitment towards the “external” dimension of energy policy. By creating
new partnerships, it aims at ensuring diversified and sustainable energy markets in the
respect of MS sovereign rights to explore and develop their natural resources. 98
Insisting on consistency between energy dialogues and foreign policy goals with a view
for private business opportunities, the Plan envisages deeper cooperation on LNG as
part of the efforts to promote safe and sustainable low-carbon and efficient energy
systems while ensuring international competitiveness. Multilateral initiatives can
fundamentally balance internal and external dimensions of global energy architecture,
expanding the geography of the Energy Union goals.99

Strictly speaking, the EESS envisages further cooperation on LNG with gas
suppliers “to identify possible sources for short-term additional supplies”.100 However,
since 2014 market conditions have changed, and in fact pledges at the G7 Energy
Ministerial Meeting in Kitakyushu (Japan, 1-2 May 2016), including those of the
annexed bilateral meeting between Motoo Hayashi (Minister of Economy, Trade and
Industry of Japan) and Miguel Arias Cañete (EU Commissioner for Climate Action and
Energy), seem to confirm a tendency toward schemes of collaborative endeavors to
secure the demand for LNG, and hence the future supply. On the other hand, the
Ministry of Economy, Trade and Industry (METI) of Japan compiled in 2015 the
“Long-term Energy Supply and Demand Outlook” for FY2030 (the “Energy Mix”) to

96
European Commission, Communication from the Commission to the European Parliament and the Council,
Europe and Energy Security Strategy, 2014, COM(2014)330 final, Brussels, May 28, 2014
97
Council of the European Union, Council Conclusions on Energy Diplomacy, 10995/15, Jul. 20, 2015.
98
Ibid.
99
Ibid.
100
European Commission, Communication from the Commission to the European Parliament and the Council,
Europe and Energy Security Strategy, 2014, COM(2014)330 final, cit.

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combine targets of energy sustainability and economic growth to the 2030 horizon. The
plan revises the goals of fossil fuel and nuclear dependency, but still projects
hydrocarbons to account for the 77% of primary energy sources and thermal power
generation for 56%.101 In particular, three are the policy goals standing at the heart of
the strategy to secure stable energy supply at low cost:
- Facilitating global investment in upstream development;
- Establishing LNG markets in readiness for crude oil price volatility;
- Exporting Japan’s energy-saving technologies to reduce worldwide dependence on
crude oil.102
The second target calls upon taking advantage of a buyers’ market to develop domestic
integrated infrastructures and to correct destination clauses, both critical elements for
the development of liquid trading hubs in Asia. As acknowledged at international level
discussions (G7), this would significantly scale up the globalization of LNG markets.
Although the METI’s Plan does not have a legally binding power, working more as an
Agenda for guidelines procurement to stakeholders, this government intervention did
help limiting targets of cheap coal use to 26% (against 27% of gas use), showing how
open governments commitments can effectively represent an important game changer.

The METI’s strategy renews emphasis on the engagement of national energy

companies abroad, State financial support and energy efficiency improvements, set to
reach targets equivalent to those achieved in the 1970s. Meaningful is the echo of the
Shigen Gaikou, or “diplomacy of resources”, the well-conscious strategy of foreign
policy and energy security implemented in the aftermath of 1973 oil shock to promote
independent access to supplies and redefine the government’s function in the global
balance of powers. This correspondence highlights the enormous significance that a
changing LNG market has for the Japanese economy. On the other hand, it engages with
the diplomatic efforts of the other stable LNG buyer, the EU, becoming a natural partner
in the promotion of a globally competitive market. In March 2016, the Japan Institute of
International Affairs (JIIA) in an issue significantly entitled Energy Cooperation and
Resource Diplomacy of Japan (日本の資源外交とエネルギー協力)103 listed some
clue recommendations to realize the paradigm shift that changing global conditions
require. Poorly endowed with domestic natural resources, Japan is forced to rely on
imports from outside a fact that naturally boosts the value of the external dimension of
national energy policies, with inherent economic and political security consequences
that won’t be addressed in the present analysis. Under the broader notion of
“comprehensive security guarantee” (総合安全保障) energy security is the first
ranking item in the Japan’s security strategy. In the national policy making,
recommendations insist, it is crucial to take into account sufficiently coordinated energy
cooperation and resource diplomacy.

Accounting for more than a third of global GDP, the scope of EU-Japan
partnership in support of LNG markets is ample. Coherent energy and carbon policies
between these two parties can still represent the signal of an aligned global vision on

101
METI, Long-term Energy Supply and Demand Outlook, Tokyo, Jul. 16, 2015
102
Ibid.
103
JIIA, 日本の資源外交とエネルギー協力 (Energy Cooperation and Resource Diplomacy of Japan), Tokyo,
Mar. 2016

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carbon price that investors await. Their ambitious NDCs require the design of
domestically and internationally integrated policies to clearly communicate the role of
low-carbon energy to the market, which would not probably deliver expected
environmental achievements without a strong political stance.104 Negotiations on a
Strategic Partnership Agreement are currently ongoing between Japan and the European
Union, and could lead to a Free Trade Agreement easing the investments in clean energy.
Meanwhile, the EU-Japan 5th Energy Dialogue that took place in Tokyo in September
2015 reaffirmed the will to further cooperate on gas security. On May 2016, at the G7
EMM of Kitakyushu, the two parties agreed to improve bilateral cooperation towards
the development of a “well-functioning international LNG market”, which was also
collectively endorsed by the other participants.105

Especially when it comes to strengthen positions with regards to both cost of

supplies and pricing formula, a certain degree of cross-countries policy coordination
provides common visions that, if coherent across different sectors and respectful of
national economic and energy peculiarities, can revitalize the LNG business. Up to now,
illiquid Asian markets represented a major obstacle to the fair development of a
well-functioning LNG market. If Japanese gas liberalization will legally become
effective in 2017, also the EU still has to accomplish the infrastructures expansion in the
Eastern and Southeastern area to ensure LNG imports and competitiveness against
Russian pipeline gas.106. In spite of the different stage of development of the EU and
Japanese energy market, shared concerns over supply security, 107 economic
competitiveness and environmental sustainability bring about a structural convergence
of national priorities which may justify further diplomatic effort.

Recommendations
With world’s population set to reach the threshold of 9 billion people in 2040
and increasingly concentrating in urban and highly dense settlements, the sustainability
of both universal modern energy access and mobility will be of tremendous impact.
LNG is an environmentally and economically viable substitute of oil-products in
transports, and a clean complement of renewables in power generation. As LNG
globalized market would allow for a reliable diversification of resources, routes and
importers, it is arguably a flexible tool to deliver energy security. In order to tackle
current market uncertainties and secure future investments in natural gas, the discovery
of a price mechanism linked to gas hubs and independent from oil indexation and
volatility is fundamental. The legitimacy of prices set at functioning trading hubs will
facilitate the confidence of banks and investors towards the LNG industry - decisive to
ensure supply in mid- to long-term scenarios. If the creation of a functioning gas market

104
The EU and Japan have pledged to reach, respectively, 0.17 and 0.16 kg of CO2 per dollar of GDP, with Japan
aiming to achieve the world’s lowest level of “emissions per GDP” (26% of GHG emissions reduction from the 2013
level, as set in its INDCs). It is noteworthy, however, that 2013 was a year of significant emissions increase in Japan,
due to the progressive shut-down of all the nuclear power plants in the aftermath of Fukushima crisis.
105
G7 Energy Ministerial Meeting 2016, Kitakyushu Initiative on Energy Security for Global Growth, Joint
Statement.
106
Current plans to expand the LNG use in those areas include the terminals at Krk (Croatia) and Tallin/Paldiski
(Estonia) although they are capital intensive and the operational costs of LNG infrastructure are high.
107
The Ukraine and Fukushima crisis clearly reemphasized the strategic importance of gas supply security and
diversification. In this sense LNG is recognized by both as a flexible tool to diversify supplies and enhance the
security of energy portfolios.

21
IEEJ: December 2016 © IEEJ2016

is subjected to the participants’ willingness to shift to hubs, a key incentive to clear the
glut will come from governments’ commitment towards regulations differentiating coal
and gas use in power generation, enforcing the use of LNG as a bunker fuel, and
improving gas infrastructures. Being a business without a specific sector where it
benefits from a dominant position in inter-fuel competition, the durability of market
confidence relies upon a long-term institutional commitment to adopt “hands-off”108
approaches with limited political interference on hubs, together with the pace of
development of energy systems committed to deliver the COP21 goals.

No other sector than power generation has such a concentrated impact on

global emissions. If the Asia-Pacific region is expected to drive the new power
generation capacity over the next 25 years,109 power capacity does not automatically
mean power generation, and indeed coal dominates the sector in China and India. An
even moderate carbon price (40$/tCO2) could still support the retirement of coal and
less efficient power plants, but would demand an enforcement of the coal-to-gas
reforms envisaged in the two countries.110 In overall Asia the priority dispatch of
low-cost low-carbon energy has been an especially sensitive issue not appropriately
addressed thus far. Europe instead has to deal with the post-2020 massive phase-out of
nuclear plants, so far the largest source of clean energy sources. On the other side, still
heavily oil dependent transportation is - together with heavy industry - the main sector
where the pace of emissions reduction falls short from the undertakings agreed in Paris.
Improvements in the use of LNG fueled fleets by the heavy duty vehicles (HDVs),
public transport and shipping sectors will likely help the development of sustainable
fuel economies. Global demand for LNG in the shipping industry has recently started to
grow. The Maritime Environment Protection Committee of the International Maritime
Organization (IMO) required maritime bunkering to limit the use of sulfurs in maritime
transportation, and the sale of LNG as a marine fuel could rise up to 24%, to 25 million
mt/y by 2025.111 Conversely, the adoption of natural gas vehicles (NGVs) has generally
decreased due to the drop in oil prices.112 In spite of recent gains in HDVs (particularly
garbage trucks and public transport), the light duty vehicles (LDVs) sector has been
keen to battery-powered solutions - up to the point that Shell has envisaged a peak in oil
demand for 2020s -113 also due to NGVs poor gas infrastructures and uncompetitive

108
IEA, The Asian Quest for LNG in a Globalising Market, 2014
109
The Asia-Pacific installed capacity is expected to triple and electricity generation to double, with renewable
energy making up nearly two thirds of the 4,890 GW added. See Bloomberg New Energy Finance, New Energy
Outlook (NEO), 2016.
110
The reforms feed expectations on LNG imports to raise, by 43% to 26 million mt (2016) plus further 22% (2017)
for China, and 19% (2016) plus further 45% (2017) in India, due to a combination of growth in consumption and spot
LNG price decline.
111
LNG as a bunker fuel complies with the requirements of MARPOL Annex VI, making it viable even if a more
stringent cap on Sulphur is put in place. However, in spite of the recent deal struck on ships’ emissions containment
in the framework of the IMO, a report by shipping and oil industry associations has already called for a postponement
from 2020 to 2025, and the stable use as a marine bunker-fuel is not likely to materialize before 2030s. See the IMO’s
Marine Environment Protection Committee (MEPC), 70th Session, Oct. 24-28, 2016.
112
Micheal Sultan, Navigant Sees Bumpy Ride Ahead for Adoption of NGVs, New York, Natural Gas Week, Sep. 12,
2016
113
Royal Dutch Shell has envisaged a peak oil demand to come within five to 15 years
([Link]
years?emailid=5655d14ccb56e60fc6447e23&segmentId=7e94968a-a618-c46d-4d8b-6e2655e68320) and Nick Butler,
on the FT, backed the announcement, arguing that with electric vehicles’ production concentrating in Germany and
China, competitiveness is boosting and soaks up petrol market’s shares, creating incentives on both public and private

22
IEEJ: December 2016 © IEEJ2016

total cost for the main stakeholders.

Fuel efficiency standards together with differentiated pricing policies in favor

of less polluting sources and technologies are likely to stimulate the LNG use in both
power and transport sectors. Incentives can also include fiscal concessions (such as a tax
relief or exemption directed to those reducing their pollutant emissions), regulatory
innovations (such as combined legislations to limit the use of sulfurs in maritime
transportation and particulate emissions of urban diesel transportation) and measures in
support of R&D and capacity building. Furthermore, considering the sector’s inherent
capital intensity as well as the role of economies of scale in fostering economic viability,
the development of the LNG industry needs to be underpinned by governments shared
commitment to support extensive and coherent LNG deployment on nation-wide scales.
Otherwise, investors’ would not probably justify big money transfers for geographically
limited policies and the consequent limited scope for investment returns. Regulatory
certainty has thus the lion’s share in incentivizing LNG use. Regulatory frameworks in
the power and transport sectors - balanced between providing guidelines and flexibility
toward stakeholders’ decisions and customization of needs - can recover the security of
gas demand in the short-term, providing the essential confidence to unblock loans and
secure the supplies over the long run.114 When different regional schemes endure in the
implementation of carbon pricing policies, price control can transform into spending
burdens and carbon leakage, with energy intensive industries facing issues of
competitiveness from free riding countries. Without a cross-countries and even
cross-regional alignment, low-carbon policies can transform into serious threats to
competitiveness, with some countries making the most of using low-priced coal at the
expense of other parties’ efforts to contain carbon emissions. In as long as inherent
scientific and economic uncertainties remain over climate change,115 the urgency to
meet environmental goals may ask for transregional frameworks of cooperation to be
included in policy responses, to ensure equal policy effectiveness for both governments
and companies across different regions. This does not mean to establish one-size-fits-all
solutions, as carbon damages can be internalized, as seen, according to different
methods (taxes, cap-and-trade, and hybrid mechanisms) and countries’ own priorities.

Finally, a noteworthy aspect is represented by the role of social acceptance and

public information. The promotion of a correct understanding of national economic
returns has been increasingly included among the priorities of LNG development
strategies.116 The development of the LNG industry is indeed a thorny subject with high
environment, economic and political stakes. Traditional administrative structures
involve states relying on bureaucratic procedures and complex decision-making often

sides
([Link]
ntId=7e94968a-a618-c46d-4d8b-6e2655e68320 ). On the other hand, the IEA predicted in its latest World Energy
Outlook report (WEO 2016) that oil demand will be raising up to 2040.
114
Limited demand will still constrain final investment decisions for LNG export projects through 2017/2018,
raising the risk of supply shortage in the post 2020s.
115
Climate change is a variable of the stock of GHG emissions in the atmosphere, and harmful effects are not
immediately detectable by emitters like the costs of abatement are.
116
See MISE, 2015, cit.; COM(2016) 49 final Feb. 16 2016, cit.; METI, Strategy for LNG Market Development.
Creating flexible LNG Market and Developing an LNG Trading Hub in Japan, May 2016, cit.

23
IEEJ: December 2016 © IEEJ2016

perceived as blurred by citizenship. Yet, rules do not gain authority simply because of
their proven or inherent efficacy but because their status of standards and norms has
been acknowledged by a particular context, where agents tend to conceive these rules as
rational. In a public policy context, long-term commitment can only be guaranteed by
public consensus. In the absence of correct information, there is a concrete risk that
non-scientifically or technically proven assumptions will spread, generating public
mistrust. Consequently, an auxiliary part of LNG recommended policies should entail
the implementation of more inclusive and participatory decisional environment with the
pedagogical intent to highlight the economic and environmental advantages of LNG
among society. Failing to meet public expectations ultimately means to lose
opportunities of endorsement, and significantly delay LNG projects and the
establishment of an LNG global architecture itself.

The narrowing gap between LNG regional price differentials has produced a
rapprochement of interests that could now lead to a convergence of visions among
importing countries. And, in fact, the plea to seriously engage in collective initiatives to
promote LNG appears in the energy security strategies of these two main actors of the
gas scene. An Energy Mix strategy echoing the Shigen Gaikou (“diplomacy of
resources”) was issued in Japan at roughly the same time the Energy Diplomacy Action
Plan was adopted by the EU. Synchronic in timelines and contents, the two strategies
are an official acknowledgment that there is a window of opportunity for developing an
international liquid market for LNG, and a statement of political will to bolster its
demand on the consumer side. Emblematic has been the interest displayed by
international leaders under the G7 Energy Ministerial Meetings where, from 2014 to
2016, the LNG has been regularly echoed as a flexible strategic instrument to deliver
energy security at low-carbon costs. Beyond policy recommendations, a regular policy
monitoring between peers enhances efficiency – by ensuring cohesiveness of standards
and performances and of social and physical sciences’ progress – and the legitimacy of
the measures adopted, promoting the correct understanding of policies. A functional
cooperation needs to involve consuming countries in a way that continuity in the policy
approach and in common standards is guaranteed, in order to assess organically
infrastructures, in terms of type, dimensions, costs and returns, and regulations on the
base of shared and internationally accepted methods of evaluation. Trustful partnerships,
knowledge sharing and peer reviews processes among governments, ministries and
project developers reinforce a proactive approach aiming at not only being educative for
the public community but also to spread essential information among stakeholders at all
the layers of society.

Conclusion
Recent changes in the LNG industry have spurred the emergence of a diversity
of collaborative actions. Going beyond the risk sharing practices of private business, the
purpose of the present work was to explore the potential for those involving
governments. The analysis focused on the current state of LNG markets, particularly in
the Asian and European scenes, to assess the scope for inter-governmental energy
partnerships in the development of globalized LNG markets, with a focus on the recent
strategies of two of the most influential LNG importers, Japan and the EU.

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IEEJ: December 2016 © IEEJ2016

With estimated 60 million mt/y free-destination LNG volumes hitting the

market by 2020, the potential for developing a liquid, globalized LNG market is
significant. Abundance of supplies, with overall 150 mtpa of LNG available over the
2015-20,117 is likely to steadily drive price convergence of markets. Progressively oil-
delinking LNG contract terms together with thriving spot prices and increased
participation to swap markets allow expectations for a commoditization of LNG and the
burgeoning of a globalized market. However, any commodity market needs to rely upon
reliable prices. Before this bridge fuel – smoothing the way to energy transition by
connecting energy demand growth with low carbon emissions – is widely adopted,
trading LNG hubs, setting transparent prices at regional level, must be developed on a
global scale. The development of well-functioning hubs does matter inasmuch as a
significant amount of long-term contracts will expire at roughly the same time
(2020-25) Asian demand and European excess capacity will have absorbed the current
LNG glut. Meanwhile, the availability of new sources will be questioned by frozen new
projects’ FIDs, where low oil prices have significantly depressed oil-linked gas prices
since 2014, making the O&G industry – and the capital intensive LNG in particular - a
challenging business environment.

Current lack of gas demand security is a serious threat to the future supply
security. The most immediate issue is the inadequacy of new investments due to unfair
pricing and demand uncertainty. Competitive oil together with cheap coal and
subsidized renewables have all represented important deterrents against natural gas
consumption, notably in the two key sectors of transport (oil) and power generation
(coal and renewables). Endeavors to boost consumption in the power and mobility
sectors are essential to revitalize LNG demand; at the same time, the delivery of
sustainable universal energy access and mobility are two of the biggest global
challenges that contemporary society is called to tackle in the near future. If the biggest
source of power in the future is expected to come from wind and solar, 118 the
integration of carbon-free renewables into the grid and the source chosen to back-up
their intermittency issue remain open questions. Emissions from the transport sector, on
the other hand, have been steadily rising in recent years, and the forecasted growth in
population and urbanization rate do not suggest that the process will reverse by itself.

Achievements in terms of sustainability require a paradigm shift of modern

energy systems. To this extent, holistic approaches in the design of energy, economic
and environmental policies pave the way for the comprehensive security and efficiency
of the envisaged strategies. Overcoming narrow perspectives and short viewed policy
goals, energy collaborative actions makes the shift an organic transition. A surge of
LNG consumption strictly depends on a collective undertaking to ensure political and
financial participation in the implementation of the infrastructures and regulations
necessary to boost functioning trading hubs and price certainty. Coherence of visions, at
least on the mid-term horizon, favors the implementation of effective carbon pricing – at
this point already largely expected, as seen, by major O&G companies and global
investments managers - that would benefit LNG demand. Finally, the inclusion of public

117
Anne-Sophie Corbeau, Introduction, in Anne-Sophie Corbeau and David Ledesma (ed.), LNG Markets in
Transition: the Great Reconfiguration, 2016, cit.
118
Bruegel, The Sound of Economics. Decarbonisation and Climate Change: Looking Ahead, Nov. 8, 2016

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IEEJ: December 2016 © IEEJ2016

information campaigns, allows for overall economic, environmental and social viability.

In recent history, the quest for widespread economic and social welfare has
been steadily associated with the concern over energy access, making natural resources
and their stable supply a matter of security. The concept of “national interest” has come
to cover elements of economics, production and natural resources that lay well beyond
the traditional concept of security, aiming to protect what is within a country’s borders.
Accordingly, within the core idea of national interests, the notion of “external interests”
emerged, as crucially determining the fulfillment of “internal interests” of sustainable
development. Energy partnerships bridge the internal and external dimensions of
national security, and the current window of opportunities is a force to be reckoned with
in the design of comprehensive, coordinated and effective global strategies.
Coordinating domestic energy policies, in the absence of even a strong organizational
body of global governance, is a matter of sophisticated, keen diplomacy. It is early to
assess the effectiveness of collective commitment to develop natural gas functioning
markets, as the emphasis on gas security and stable gas markets has only recently
emerged in the global political agenda. The undeniable intensification of the
international energy dialogue at ministerial meetings and deputed bodies suggests that
there is still plenty of room left for a further expansion of cross-countries partnerships in
the energy sector, including for LNG.

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Fulford Nick, Ryan Pereira, Gas Market Reform – Death of Oil Indexation and
Resulting Impact on Asian and Global LNG Prices, Gaffney Cline and Associates.
International Group of LNG Importers (GIIGNL), The LNG Industry in 2015, GIIGNL
Annual Report 2016 Edition.
JIIA, 日 本 の 資 源 外 交 と エ ネ ル ギ ー 協 力 (Energy Cooperation and Resource
Diplomacy of Japan), Tokyo, Mar. 2016.
Oxford Energy Forum (OEF), LNG Markets: the Great Reconfiguration, OIES, Issue
106, Aug. 2016.
Platts, Japan’s Oil and LNG Price Evolution, Special Report, S&P Global, Sep. 2016.
Timera Energy, Global Gas Market. The Path to Market Recovery, Oct. 2016.

Government Publications
Italian Ministry of Economic Development (MISE), Documento di Consultazione per
una Strategia Nazionale sul GNL (Consultation Paper on a National LNG Strategy), Jun.
2015.
Ministry of Economy, Trade and Industry of Japan (METI), Strategy for LNG Market
Development. Creating flexible LNG Market and Developing an LNG Trading Hub in
Japan, May 2016.
Ministry of Economy, Trade and Industry of Japan (METI), Japan’s Energy White
Paper 2016. Long-term Energy Supply and Demand Outlook for FY2030, Jul. 2016.

IGO Publications
European Commission, A European Strategy for Sustainable, Competitive and Secure
Energy, COM(2006) 105 final, Mar. 8, 2006.
European Commission, Energy 2020 – A Strategy for Competitive, Sustainable and
Secure Energy, (COM (2010) 0639 final, Nov. 10, 2010.
European Commission, Communication from the Commission to the European
Parliament and the Council, Europe and Energy Security Strategy, 2014,
COM(2014)330 final, May 28, 2014.
European Commission, Communication on the short-term resilience of the European
gas system. Preparedness for a possible disruption of supplies from the East during the
fall and winter of 2014/15, COM(2014) 654 final, Oct. 16, 2014.
European Commission, Commission Delegated Regulation (EU) 2016/89 amending
Regulation (EU) No. 347/2013 of the European Parliament and of the Council as
regards the Union list of projects of common interest, Nov. 18, 2015.
European Commission, Communication from the Commission to the European
Parliament, the Council, the European Economic and Social Committee and the
Committee of Regions on an EU Strategy for Liquefied Natural Gas and Gas Storage,
COM(2016) 49 final, Feb. 16, 2016.
European Council, Conclusions, (EUCO 11/15), Mar. 19 and 20, 2015.
European Council, Council Conclusions on Energy Diplomacy (10995/15), 20 Jul.,
2015.
European Parliament, Directive 2009/73/EC of the European Parliament and of the
Council, Official Journal of the European Union, Jul. 13, 2009.
International Energy Agency (IEA), Developing a Natural Gas Trading Hub in Asia.
Obstacles and Opportunities, Partner Country Series, 2013.
International Energy Agency (IEA), The Asian Quest for LNG in a Globalizing Market,

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Partner Country Series, 2014.

International Energy Agency (IEA), Mid-Term Gas Outlook, Jun. 2016.
International Energy Agency (IEA), World Energy Investments, 2016.
International Energy Agency (IEA), World Energy Outlook, 2016.

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